We are positive on pharma, diagnostic, FMCG, and other consumer-facing companies
The Nifty50 Price to Earnings (PE) premium, especially in the last 7-8 years is due to what I call the ‘Sher Aaaya’ syndrome. Each year, analysts have been expecting a 14-15% earnings growth, Prasanna Pathak, Head of Equity at Taurus Mutual Fund, said in an interview with Moneycontrol’s Kshitij Anand.Edited excerpt:
Q) Market is holding strong 9,000 levels, do you think we are slowly moving out of the bear phase?
A) Historically, bear markets have lasted anywhere between 6 months and 30 months. If we look at Nifty50 or the S&P BSE Sensex, the bear market is only 2 months old.
However, the broader markets have been in a bear phase for more than 2 years now. Even in the Nifty or Sensex, more than 50 percent of the stocks have been in a bear phase for more than a year now.
Having said that, we do believe that the real pain in the economy will be reflected in the next 6 months and hence another down-leg is a high probability event. There is a possibility that the broader markets might outperform in this down-leg.
A) The worst fears post the COVID-19 world is that of the protectionist policies being followed by many countries, the ensuing cold war, and turmoil in the currency markets.The investment climate might take a hit in the short-term. However, with the unprecedented printing of money going on globally, it will be interesting to see which asset classes the printed money finally lands up in.
Q) If someone plans to construct a portfolio what should be the ideal portfolio allocation and why?
A) The portfolio construction depends on many factors like age, risk appetite, goals, financial health, etc. to name a few. A person in his 30s with moderate risk appetite can have approximately 30 percent in Bank FD/liquid Funds/Arbitrage Funds, 20 percent in Debt Funds, 35% Equities, and 15% Gold/Gold ETF (I have excluded real-estate here.).
This allocation strategy gives proper diversification across asset classes. Even individual asset classes should be further diversified across different fund-categories.
These are indicative allocations and will depend on various factors mentioned above. It is advisable to consult a wealth advisor for tailor-made strategies.
Q) How is Nifty50 placed when we compare it with historical averages?
A) The Nifty50 Price to Earnings (PE) premium, especially in the last 7-8 years is due to what I call the ‘Sher Aaaya’ syndrome. Each year, analysts have been expecting a 14-15% earnings growth.
However, due to some extraordinary event (ex: demonetization, GST, NBFC crisis, COVID-19 etc), the actual earnings have turned out to be much lower.
These events, by nature, have been one-time/ temporary events but have occurred in tandem one after another. So coming to the NIFTY PE premium, since it discounts forward earnings, the hope is that earnings will rebound in the next two years.
However, given the fact that we have been in a depressed earnings scenario for a prolonged period now, the probability of a robust earnings rebound (actual ‘ Sher aaya’) cannot be ruled out.
Q) Historically, markets have usually rebounded the most in 3-6 months post sharp corrections. Barring the Tech meltdown in 2000, markets have delivered positive returns in the subsequent 12-month period.
A) We are in unprecedented times and predicting 6-12 months returns will be difficult. We are already in the midst of a bounce back and have recovered almost 30% from the bottom. Given historical evidence, the probability of good returns over a period of 2-3 years is high.
Q) On average, it takes about 156 days between peak to trough – the lowest has been 35 days in 2006 and the highest 410 days during Nov’10-Dec’11. When do you see Indian markets returning to bull phase?
A) As mentioned above, these are unprecedented times. We believe that the next 6 months will be challenging for the economy front.
Assuming most concerns are mitigated by that time, it will take at least another year for the economy to normalize. In such a scenario, the Capex cycle can start by FY22-23 in the midst of benign interest rates.
So, in the absence of any further shocks, the economy can be expected to be in a moderately bullish phase around FY23-24, which also happens to be an election year in India. Since Mr. Market is a forward discounting entity, it may start discounting about a year in advance.
Q) India has a long road ahead to catch up with China. But, it must be now that India has to act. Which are the companies that are likely to emerge as big winners from Trade War 2.0?
A) In the backdrop of backlash against China, there is a window of opportunity for India. Given its scale and also since its tax rates are now at par with various other Asian exporters, India has the potential to emerge as a preferred option to China.
Also, this is the right time for the government to flex its muscles and insist on all companies to have a local manufacturing base if they wish to cater to our vast consumer base. Companies that can support and cater to such manufacturing bases will benefit. Also, depending on how global trade set-up evolves, certain export-oriented companies with a strong balance-sheet and scale would benefit.
Q) Which are the sectors that you are positive on?
A) Broadly speaking, we tend to be positive on Pharma, diagnostic, FMCG, and other consumer-facing companies.
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