Valuations are already factoring in the next year’s (FY21-22) numbers, and therefore, a significant up move in the near term appears to be difficult, said Shyamsunder Bhat, CIO, Exide Life Insurance.
In the near term, we are cautious, though we remain optimistic for the longer term, he added.
Q. What is your call on markets & earnings which are on the verge of hitting fresh record highs? And, will we be able to sustain it?
A) The June quarter results had surprised positively, with analysts having significantly lowered their expectations earlier due to the lockdown. The impact on margins had been lesser than feared, thanks to stringent cost control by corporates. This, coupled with a relatively optimistic commentary from some of the corporates, led to the uptick in stock prices continuing during the past few months particularly in the midst of significantly large purchases from FIIs.
We are now in the midst of the September quarter results season, and the management commentary on the extent of the revival in respective sectors and more importantly, their expectation of the sustenance of the demand growth, would be keenly watched.
Valuations are already factoring in the next year’s(Fy21-22) numbers, and therefore a significant upmove in the near-term appears to be difficult. So in the near-term, we are cautious, though we remain optimistic for the longer-term.
Q. Your message to investors for this Diwali and your outlook for next SAMVAT?
A) We are now already witnessing price targets by analysts based on projected estimates for FY23, and this could partly because it may be difficult to project upsides based on Fy22 numbers.
In the near-term, we could see some volatility given the valuation levels, particularly with some monitorables such as the demand during the festive season, the trajectory of Covid cases in India, the newsflow on commercialisation of vaccines to address the Covid pandemic, as well as the upcoming US election outcome.
The message to investors would therefore be to have a long-term perspective (5 years+) in their allocation towards equities.
Q. What is the importance of asset allocation and why is it more relevant when Gold and probably global investing might have delivered better returns than domestic equities?
A) The importance of Asset Allocation can be seen from the divergence in returns between various asset classes over the past 5 years. Return-expectations, risk-appetite and age of the investor, are the important factors which influence asset allocation. While it is useful to look at past trends, one should also evaluate whether these trends would necessarily continue in the same manner going forward, or not.
For example, in the past 5 years, we have seen equities not do as well as fixed income investments, due to various factors at different points in time. However low interest rates for longer periods of time are one of the factors which could influence earnings and equities positively over the next 5 years.
There have been different phases in time when individual asset classes have done significantly better, like gold and global investing which you have mentioned. The extent of liquidity globally, the outlook for sustenance of the same, the level of risk being perceived in financial markets, the outlook for currencies: these are some of the factors influencing the above two asset classes which you have mentioned.
Q. How will markets react if Donald Trump wins the US elections? Would that be good for equity markets? What is street factoring in? How will markets react if Joe Biden wins? What should be the idea strategy now ahead of US elections?
A) The manner in which the markets (both US and global) could respond in the immediate near-term post the election results, need not necessarily be indicative of the trend over the medium-term thereafter. It is difficult to comment on the near-term reaction. Would therefore mention some of the issues that the US markets may monitor and react to, over the medium term: trade policy (particularly pertaining to China), healthcare (prescription drug reforms), taxation, spending on infra, issues pertaining to visas, etc.
There could be several more issues, but the ones listed above could influence markets in general, and some sectors in particular, with an impact on Indian markets and sectors as well, and hence mentioning these specific factors.
Q. The investment universe has shrunk dramatically post the COVID outbreak as many businesses have moved to a new normal. Do you think investors should focus on profitability (growth), and not so much concerned above large, mid or smallcap?
A) Investors should look at companies which have the ability to tide over situations such as being witnessed this year, and emerge stronger from the same. This could be seen from the results in the first 2 quarters, as well as the management commentary. Yes, there could be companies from different market-capitalisation ranges which could fit the above criteria.
There are some obvious sectoral beneficiaries from the “new normal”, which has largely been reflected in the sharp re-rating in these over the past few months.
Q. Do you think the recent micro-data suggests that green shoots are visible and that is one of the prominent reasons for the confidence we are seeing on street?
A) Auto, cement, power, fuel and even real estate to an extent! : The recent data does suggest that the activity levels are normalising, but it would be good to wait for a couple of more months for a better indication of the same. Particularly whether it is was a pent-up demand in the recent past, an upcoming festive demand or whether we have actually normalised as an economy (as there still appear to be sectoral divergences presently). Employment figures and salary hikes in some of the sectors are positive indicators as well.
Q. PM Modi urged the people of India to enjoy the festivities but with caution as COVID is not over yet. Do you also advocate similar advise to stock market investors?
A) We are seeing a second wave of infections in Europe and some of the other countries, which is concerning, however we are thankfully seeing some respite presently in India in terms of the incremental daily cases, which are now significantly lower than those witnessed during September peaks. It is important to remain cautious, particularly as the mobility increases with lockdowns reduced to minimal and with festive shopping and State elections.
From the stock market perspective, it has been a liquidity-driven rally and has now largely discounted the substantial earnings growth expected in Fy22 from a depressed base of the current year (Fy21). It is also factoring a positive sentiment from the revival in economic indicators, the positive commentary from many corporates as well as an anticipation of an early commercialisation of Covid vaccines in the coming months.
It is important to mention that along with large FII buying, there has also been a significant direct retail participation in this rally, and therefore caution is advised at current levels. Long-term outlook continues to be positive, but the investment perspective of investors should therefore be accordingly longer-term, as we may not witness a unidirectional upward movement such as the one witnessed in the past 6 months.
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