The well-known popular stocks are trading at high PE and expensive valuations. So, the opportunity there is not much. FIIs are making the mistake of going after stocks that do have strong fundamentals. These are the typical bull-market stars, and we would like to caution investors to stay away from these, says Dr. Vikas V Gupta, CEO & Chief Investment Strategist at OmniScience Capital.
Gupta has over 15 years of experience in Indian financial markets. A B.Tech from IIT Bombay and a Masters and Doctorate from an Ivy League University—Columbia University, New York, Vikas incubated the global listed equity vertical of a multi-asset class investment management firm, obtaining, perhaps, the first US SEC license for an Indian firm.
In an interview with Moneycontrol's Kshitij Anand, Gupta said that the real opportunity lies in below-the-radar stocks which are fundamentally strong, with strong balance sheets, persistent competitive advantages, large growth opportunities, and are available at super normal prices.
The US Fed signalled a sooner than an expected rate hike. What kind of impact you foresee on Indian markets and currency?
To understand the impact we need to first understand what are the priorities of the US Fed? What the US Fed has maintained throughout that it will react to factual economic feedback based on data on growth, employment, and inflation.
Their first priority is to achieve maximum employment. The inflation target is an “average” of 2%. Since the inflation has been below 2% for quite some time, the Fed finds it acceptable to let inflation remain above 2% for some time so that the average over the full period is around 2%.
With this background, the expected rate hike could happen sooner. But, the Fed dot plot is not cast in stone. The two rate hikes by 2023 basically mean that the median of the mid-point expectations of the FOMC is now higher by 50 bps compared to previous meetings.
So a few more FOMC members now think that the midpoint of the Fed fund rate will be higher in 2023. We don’t foresee any impact in the near term for the Indian markets.
US unemployment, which is currently around 5.8% has to reach below 4% before Fed can do a rate hike. That remains quite far given that the participation rate will also increase as growth happens in the US.
Currently, the high inflation of some items in the US is driven by supply bottlenecks and not due to a long-term demand-supply mismatch.
The currency could face issues since it is impacted by relative interest rates between India and the US and also the Indian inflation rates.
In fact, we think that as the US economy does better, the initial impact will be more positive towards the Indian markets.
As the US demand improves, Indian exporters like IT are likely to see higher growth and acceleration in revenues and earnings.
Also, the US economy doing well has higher-order effects in terms of a positive impact across other economies with strong linkages to the US.
Do you think the Fed event will have an impact on FII flows as well?
FIIs are likely to continue having more liquidity and will continue looking for places to deploy their capital. The Fed meeting confirmed that Fed is not in a hurry to hike.
The focus remains on reducing unemployment and maintaining GDP growth. Also, the Treasury securities and MBS purchases of $120 billion per month will continue unabated.
So there is no change in the stance of the Fed. A few FOMC members have changed their midpoint expectations for 2023. That has changed the median.
This has confirmed to the financial industry that the liquidity will remain high and hence search for higher yields will continue.
The FII focus is likely to be towards undiscovered ideas. So the top, well-known, high PE stocks are likely to take a breather and search for FIIs will be places where they are under-allocated and the discount to intrinsic value is still high.
Indian market is trading at expensive valuations when we compare it with historical levels. How should investors approach the market at these levels?
The well-known, popular stocks are trading at high PE and expensive valuations. So, the opportunity there is not much, it could yield negative returns if there is mean reversion in the PE or they disappoint in terms of growth vs. expectations.
Many investors, including FIIs, are making the mistake of going after stocks that do have strong fundamentals. These are the typical bull-market stars. We would like to caution investors to stay away from these.
The real opportunity lies in below-the-radar stocks which are fundamentally strong, i.e. Super Normal Companies, with strong balance sheets, persistent competitive advantages, large growth opportunities, and are available at Super Normal Prices, i.e. at prices significantly below their conservatively determining intrinsic values.
We at OmniScience Capital have a number of such Super Normal Portfolios identified so that the average investor doesn’t have to search for those. But, an investor can do the same.
The investor can start identifying these companies with strong balance sheets and which are below their intrinsic values. They should keep away from the overvalued portion of the market and monetise the gains and redeploy in the below-the-radar opportunities.
But, even bigger caution here. Keep away from high-debt companies. Keep away from tiny companies. Keep away from loss-making companies.
Speculating on exiting equity markets because a crash will happen is not a strategy. Do not chase stocks due to FOMO (fear of missing out). Stick to your asset allocation and continue systematic allocation every month to equities.
So the cheap money or the borrowed money is likely to slow down – which sectors could see the impact of that?
We think that the impact will be highest on purely speculative instruments, such as cryptocurrencies.
In terms of sectors, we have always been guarded against leveraged sectors. Real estate could see a direct impact as cheap money becomes scarce.
There is a lot of chatter around inflation, but at the same time inflation also brings growth which India needs at this point in time. Do you think RBI could actually ignore inflation for some more time and stay put and focus on growth even though the Fed signalled it stance?
RBI will take a nuanced approach to handle inflation. RBI would not react to headline inflation numbers. If RBI sees the possibility of sustained inflation in the core consumer basket then RBI will step in with interest rate hikes.
Even for addressing that RBI has clearly stated its bias towards growth and is likely to tolerate some inflation above its range. The RBI stance is not very different from the Fed stance. Neither Fed is in a hurry to increase interest rates, nor is RBI.
What is your view on global commodities?
In the previous cycle, global commodities went up due to China buying for their infrastructure growth and also for their “strategic reserves”.
For a similar demand growth to happen again, the US and European infrastructure investments have to happen at a very high pace. While infrastructure investments are being signalled from the time of Trump and Biden has also emphasised, it is unlikely to happen at a very high pace.
Also, the “strategic reserve” part of the demand is unlikely to happen. In fact, if China starts releasing its “strategic reserves” of commodities in the global markets since it might realise that there is not much “strategic” about many of those, then it could have the opposite effect.
We think the supply-demand and hidden reserves and how they are leaked or hoarded is quite difficult to estimate and would not try to participate in this FOMO trade.
We are on the verge of completing the first six months of 2021 – and the journey has been fabulous. We have seen Nifty hitting 15,900, Sensex had a touch-and-go moment with 53,000. How do you sum up the rally?
To have the correct perspective, Sensex is up by around 45% from Jan 2018 and the midcap and smallcap indexes are up by around 25%. 25% growth over 3.5 years is not significant.
We think that the impact of the earlier US Fed rate hikes of 2018 which caused the bear markets of 2018 and 2019 is now over. A new cycle has just started.
While we do not speculate on whether a bull market will continue or a crash is imminent, we do know that there are a significant number of Super Normal Companies available at Super Normal Prices.
We think that one should focus on bottom-up stock picking and keep away from tips. The market is likely to continue rewarding in the long term.
Your views on 2H2021 for markets. Which sectors will hog the limelight?
We think that by 2H2021 the vaccination in India will be progressing really well. Also, the reopening will help revenues of many sectors like aviation, tourism, entertainment, commercial and retail real estate.
But, for us the focus is more on the infrastructure spending of the Government of India under various Atma Nirbhar Bharat initiatives, such as power sector and railway infrastructure. Further, the IT sector is likely to shine in the light of the US economy doing well and getting more digital.
We will continue our focus on bottom-up stock picking and exiting positions where Mr. Market starts fully valuing the stocks and entering positions where Mr. Market has myopia and is not able to see the value properly.Disclaimer: The views and investment tips expressed by the expert on Moneycontrol.com are his own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.