Gaurav Misra, Co-Head Equity, Mirae Asset Investment Managers (India) Pvt Ltd, believes that as far as domestic stock markets are concerned, valuations are definitely ahead of long-period averages but not in a bubble zone.
Misra manages Mirae Asset Focused Fund and co-manages Mirae Asset Large Cap Fund. Prior to joining Mirae Asset Mutual Fund, he was associated with ASK Investment Managers Pvt Ltd for 14 years.
In an interview with Moneycontrol's Kshitij Anand, Misra said that he prefers to invest in companies that have a strong well-run business model, with good growth prospects, and are available at the best possible margin of safety. Edited Excerpts:
Q) What a month it has been for markets. Fresh record highs, which was followed by some volatility in the broader market space, and then again we found some stability. How is the market looking according to you?
Misra: It is difficult to predict the short-term direction of the market. However, for investors with a long period investment horizon, I believe that equities will continue to give superior compounding returns than most other alternates.
Q) Well, Jim Riggers has warned of a bubble in the debt market space across the globe, and the warning was stretched to stocks as well. What are your views – is the market in a bubble zone and the hope-based rally could take a knock?
Misra: Globally, there is a lingering doubt of the impact of loose monetary and fiscal policies on reigniting inflation. On the other hand, similar policies like the QE were successfully implemented post the 2008 GFC without any untoward surge in inflation.
However, this time around, indebtedness levels in some of the major economies is higher than a decade ago and there can yet be unintended consequences.
As far as the domestic stock markets are concerned, valuations are definitely ahead of long-period averages but not in a bubble zone.
There is the support of a reasonably strong corporate earnings growth outlook, healthier corporate balance sheets, and relatively stable macro’s.
In the short term, domestic markets could be volatile or time correct. Recent high-frequency data suggest a healthy pick-up in the activity but an even more virulent third wave with attendant lockdowns could be the bigger overhang.
Q) What are your views on the EV space which seems to be getting all the attention? Many companies are coming out with CAPEX plans on developing EV or switching to clean energy?
Misra: The shift towards EV/Renewables is inevitable and the only thing to monitor is the pace at which this might happen. At this stage, expectations are that 2Wh/3Wh would see the early migration followed by PVs.
Incentives from both the central government and a lot of state governments, decreasing upfront cost, decreasing lifetime cost of ownership of EV vs IC vehicles will encourage this shift.
Good management will have to participate and lead this shift else they may be left behind. There are already a host of new-age companies with products in the EV segment while incumbents are also developing offerings in this area.
Additionally, this might be an opportunity for many Auto ancillaries’ to evolve their product portfolio.
Q) Small & midcaps have gone up 3-4x from the lows. Do you think this euphoric rally has stretched beyond the limit? When could the music stop?
Misra: Post covid, the overall environment can remain sustainably supportive of growth for the next few years. Many mid and small companies will participate in this journey.
I do not think there is an overall case for or against any market capitalisation. The returns from here on will be driven by stock selection irrespective of market capitalisation.
Of course, weaker businesses will lag while good firms might consolidate if valuations have run ahead and there will be bouts of category volatility.
From an investor’s perspective, depending on his/her risk considerations, an appropriate blend across categories should be sustained.
However, a very large weight in smallcap is not advisable as more businesses in that category are vulnerable in periods of economic and market weakness.
Q) What is your investment mantra or your checklist before buying a stock?
Misra: Prefer strong well-run business models, with good growth prospects and at the best possible margin of safety.
Q) What is your take on current Nifty valuations? Are we trading at a premium and how do we stack up against our emerging markets peers as well as developed markets?
Misra: YTD the Nifty has been amongst the better-performing markets worldwide and the best within the EM cohort. The Nifty is trading at a premium to all meaningful emerging markets.
It is also trading at a premium to most developed markets as well, except the USA. The Nifty is trading at a premium to its historical averages. The magnitude of premium to average increases the longer the period we take for calculating the averages.Of course at this point outlook for a revival in the earnings cycle is robust even while the liquidity and monetary environment is accommodative and supportive of growth.Q) The IPO euphoria is only getting bigger by the day. How do you sum up the action? What is the kind of fund raising you foresee for the rest of 2021?
Misra: In the last decade there have been at least 6 years when the number of IPOs has been higher than the number which has raised YTD.
However, the current year is already at the second rank for the amount of funds raised. The pipeline for the rest of the year suggests that we will have the best year in a decade in terms of the quantum of IPO money raised.
If the proposed pipeline for the calendar year materialises we would be seeing twice the money raised over the best year so far.
The money raise indicates a blend of strong liquidity, interest in new-age business models as well as many upcoming sectors, early round investors booking profits, and an overall strong outlook for Indian businesses.
Q) Any pocket or sector which you think could come under pressure in the near future and why?
Misra: If there is no strong third covid wave, I would expect consolidation in some well-performing and fully valued sectors such as chemicals, and the strength of Chinese growth will have a bearing on global commodities.
Q) The much-talked-about $1 trillion infrastructure bill got approval from the US Senate. Which sectors could benefit from the move?
Misra: There would be a marginal increase in demand for base metals. There is an additional USD 550 b spend on infrastructure proposed from what was expected earlier.
The bill has to still pass through the house. The proposed spend is spread over investments in roads/ports(20%), railways(12%), power including EV/RE(20%).
Metals such as steel, copper, and aluminium would see an incremental demand on account of this. It is estimated that if all approvals fall in place, relevant projects are identified/executed than there could be an incremental increase in US steel demand by around 2% after 2 years.
Thus on the margin, there would be some positive impact on demand for these metals.
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