We believe the IT sector, technology along with telecom, parts of the pharma sector are trends that will last for a while. This should be sectors that will – even after having revalued, give reasonable returns over time, Aditya Narain, Head of Research – Institutional Equities at Edelweiss Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpts:
Q: Do you think the time has come to rejig portfolio given the stellar rally from March lows across indices and the rally seems to be not showing any sign of cooling down?
We would believe it is most appropriate to be clear headed in terms of themes to play. In that context, we believe the IT, Pharma and Global Reflation lays would be the most appropriate. We would be wary with domestic cyclical - auto and the banks, which we believe is extrapolating a relatively normalized recovery trend – we don't believe that will be the case. We would likely allocate about 50 percent of our portfolio, to domestic equity.
Q: Do you think one should stay away from market now given the expensive valuations and the economy is yet to show strong signs of growth?
We do believe the monetary framework, globally, has changed for atleast the medium term. To that extent, the markets valuation framework will likely remain a little more elevated than historical averages, or conventional multiples represent. To that extent we would be a little cautious with domestic equities and see some market downside over the next 12 months. That said, we believe there are strong underlying structural themes to play - and we would play some of the more structural themes that we have highlighted above.
Q: Some experts are saying the rally seen in midcap and smallcaps is largely driven by few stocks. Do you feel so? If yes then when can we see the broader rally? Also will it be a year of Midcap and Smallcap over Largecaps?
I am not sure if we would want to define the market in such terms, at this stage, when a fair level of catch up and valuation normalization has already taken place. What we do believe is that the strength of the midcaps is fairly proportional to the breadth of the economic recovery. To that extent, we believe the jury is still out in terms of the economic rally that is currently underway – and we would be cautious on its sustainability. In that context, we believe it’s safest to play market leadership rather than the scale divide – the consolidation theme has only accelerated, and profitability and stock values will tend to continue to drift in those players.
Q: Do you think liquidity, the major driver for rally so far, is the key risk for market? Also what are other risks which one should consider while looking at investment in equity?
Liquidity – in the many ways one defines it, is a prominent risk – though we don't necessarily believe it's the dominant risk. We do believe fiscal and monetary support will stay for a while – so at the base money level, it’s probably a little more modest that the consensus liquidity risk. We would argue the potential narrowing and debasing of incomes in the economy on account of COVID: the risk in imposes on demand - near term and potentially beyond, is the bigger challenge. It could unsettle a lot of growth expectations, income streams and consumption patterns: could cause pain at the aggregates, but potentially even more so for specific lines of business, and stocks.
Q: Do you really see strong momentum in primary market in coming months as many experts said lot of IPOs are going to hit Dalal Street in next few months?
We do see capital market intensity and activity. The need for confidence capital - more than growth or opportunity capital (in most cases), will keep that market active. We also believe it’s a good thing – and a very good way of moderating risks in the economy, and providing the firepower for an economic expansion - when the time is right. Primary capital markets activity also provides liquidity to investors and assets – and we believe that is a good and necessary thing, for value realization and benchmarking, and for growth.
Q: What are those key sectors one should start investing now and why?
We believe the IT sector, technology along with telecom, parts of the pharma sector are trends that will last for a while. This should be sectors that will – even after having revalued, give reasonable returns over time. We believe global cyclicals - Metals, exports including global auto, could offer reasonable returns. And we see the rural space positioned for a little more momentum - that could well be nearer to the best phase being over.
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