Daily Voice: This portfolio manager sees strong value in largecaps and 4 key sectors amid market correction

Middle Eastern tensions have already evolved to become a regional war. There is a possible risk of allied partners joining in and making it a global conflict. We expect markets to remain volatile until things de-escalate. While the world awaits Israel’s response to Iran’s attack, it would be speculative to predict near-term market price action. As Scientific Investors, we would focus on undervalued, fundamentally strong, underleveraged and strong growth opportunities that are likely to have minimal impact from an elevated regional conflict involving multiple countries.

Is the current correction a great opportunity to buy or should one wait for some more time to start accumulating quality stocks?

Investors need to stay away from the ‘quality traps’ and should focus on the truly mispriced opportunities before allocating capital. The current correction is a great opportunity to allocate to large caps which are significantly more favourably priced compared to the mid & small cap segments of the market. Investors should also stay away from sectors that may be directly impacted by the ongoing conflict from rising input costs or other operational challenges.

Which are the sectors to pick in the current market correction?

We see value in the banking, housing finance, power and IT services sectors. All these growth vectors are favourably positioned to deliver multi-year growth in revenue and earnings, each of these sectors has strong balance sheets and are available at attractive valuations. Expected interest rate cuts over the next 2 years and the adoption of AI benefit this sector is various ways.

Do you think the serious money is flowing to China due to attractive valuations and recent stimulus measures taken by the government?

The Chinese economy is struggling. China is finding it difficult to manage its massive debt which is estimated to be over 300 percent of its GDP after accounting for the debt taken by local government financing vehicles (LGFVs) and corporate debt, a large part of which is owned by state-owned enterprises (SOEs). While other global economies have seen sharp spikes in inflation in the last two years, China has experienced five straight quarters of deflation due to the collapse of its housing market. Investors are more likely to wait to see the impact of the proposed fiscal measure before allocating any capital.

Do you see the risk of earnings downgrade for banks in Q2FY25?

With overall bank credit growing year-on-year at 13.7 percent and 13.6 percent for July and August 2024 respectively, we see there is little risk of earnings downgrades for banks. On the contrary, we see a significant possibility of an upward rerating of the whole banking sector with average annualised earnings growth of ~12 percent as per the consensus estimates for the next two years and the current earnings yield in 5 percent to 15 percent range. Additionally, the fundamentals of the banks are at one of their strongest levels with large capacities to lend further.

Are the valuations still attractive in the pharma and healthcare space?

Overall, pharma and healthcare have remained more than fully priced for the growth opportunities these sectors offer. Nifty Pharma index, currently at a P/E of 38, is fully priced for an average earnings growth of around 10-11 percent based on 1-year and 2-year consensus estimates. Mr. Market is probably pricing it to perfection for the stability and predictability of earnings, but this leaves no room for identifying an alpha opportunity. The earnings growth expectation from the non-pharma healthcare names is much higher in the mid to high double-digit range with 75 percent of companies having a forward P/E of more than 60! Investors in this space should build moderate expectations for the next 1-2 years.

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