Liquidity and negative interest rates globally will continue to drive investment in financial markets, says Devang Mehta of Centrum Wealth Management.
After a fast rally, minor corrections should not come as a surprise. The market will more or less fall in line with global trends, with the US elections a key event to watch out for. The dollar is weak but that might change. Hence this money can move out and any risk in the system can also push this money away from emerging markets, Devang Mehta, Head–Equity Advisory at Centrum Wealth Management says in an interview to Moneycontrol's Sunil Shankar Matkar. Edited excerpts:
Q: Do you think the US elections are a major risk for India? What are the other risks that can impact growth?
The recent communication of the new Federal Reserve policy framework by Chairman Jerome Powell that monetary policy will stay extremely loose for longer will keep key rates lower and will be a positive sentiment booster for the global markets. However, with the US elections approaching in what will be a highly contested battle, there is a fair amount of volatility, which may act as a spoilsport in the ongoing rally. Also locally, a significant deceleration in growth could be seen, as the surge in demand related to the reopening of the economy will fade. India-China tensions on the border are another variable, which comes into the proceedings intermittently. Valuations have also started to look a bit stretched, in the absence of earnings growth.
Q: What is your take on the banking sector, especially after the end of the moratorium period and the expected non-performing assets (NPA) issue?
The banking sector will be in for a rough ride in the shorter term in view of continued capital requirements for public sector banks, an anticipated spike in stressed assets, higher credit costs, weaker earnings due to interest reversals and lower fee income and muted growth prospects in the wake of the measures taken to contain the spread of Covid-19.
However, most large banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio. While the credit growth could remain dismal, and short-term financial performance could deteriorate modestly, large banks may benefit from credit migration. As opportunities arise, these banks are in a position to gain substantial market share in the medium term.
Q: Given the recent measure by the government, do you expect more FPIs/FDI to come into India in the coming months? Which sectors can attract FPIs/FDI, and should one start investing in them?
With global central banks being in a charitable mood, a lot of liquidity has found its way to emerging markets like India. Off late, the rally has also been broad-based and covering the entire spectrum of market capitalisation. Indian equities reported a decade of high monthly inflow from foreign portfolio investors (FPIs) in August. The recent share sale by many listed companies and reduced interest rates have attracted the foreign investors' money into Indian equities.
While such FPI equity flows support domestic equity markets and investor wealth, their translation into jobs and output is more tenuous in comparison to FDI flows. With Reliance Jio raising at Rs 1,53,000 crore via multiple deals with global giants, the appetite for such businesses that are using disruptive technologies is huge. Also, seeing the recent successes of a few new-age IPOs, there seems to be a high demand for quality paper. Successful QIPs, rights issues, etc by a lot of companies also augur well under the prevailing circumstances. CY20 YTD, healthcare and IT continued topping the charts while financials languished at the bottom. A lot of action can be seen in these sectors going forward.
Q: Do you expect more inflows into smallcaps and midcaps after Sebi tweaked multicap fund norms? What could be the reason behind it and do you expect Sebi to bring in more such changes?
Clearly the premise to invest in small and midcaps has to be on merit rather than the tweak in MF norms. With the ongoing rally in mid and small caps, the huge valuation discount between these indices compared to the Nifty has now narrowed. Rather than putting them in different buckets of market cap, it is imperative to judge the quality of business and earnings profile and be market0cap agnostic.
The major reason behind bringing in this norm is that a scheme has to be true to the label, hence a multicap fund should have holdings across market capitalisation. The AMCs have been given a lot of flexibility in terms of how they deal with the new norms like merging the schemes, providing investors the option to switch to other schemes, convert the scheme into another category or rebalance the portfolio in line with the new norms.
Q: Most experts say a correction is due given expensive valuations. Do you expect 5-10 percent kind of correction in the coming months or are markets waiting for the US elections?
Once the printing of money stops and once normalcy resumes, the inflows could cool off. The dollar is weak but that might change. Hence this money can move out as well and any risk in the system can also push this money away from emerging markets. After such a fast and furious rally, minor ebbs and corrections should not come as a surprise. Our market will more or less fall in line with global trends, where the key event to watch will be the US elections.
On the contrary, it is expected that liquidity and negative interest rates globally will continue to drive investment in financial markets. Keeping money in a bank or in fixed deposits is not the best option as interest rates are lower. Expectations from equity over a period have now become realistic and in absence of any lucrative investment avenues, quality stocks will find buyers on any material correction. Buying great companies with pragmatic return expectations is the order of the day. Don't go down the quality ladder just for the sake of investing; this is important in the present context of a very sluggish economy.
Q: Midcaps and smallcaps have outperformed the benchmark indices but is the rally driven by fundamentals?
The best way to construct or realign the portfolio is to focus on the leaders in strong and relevant sectors. Market leaders do exist across the market-cap spectrum, be it large, mid or small. If these companies have exhibited to survive through difficult cycles in the past and do show earnings potential along with the simple traits of high ROE and durable competitive advantage along with necessary checks and balances in terms of fundamental matrices, they qualify to be portfolio stocks. There are sectors like chemicals, diagnostic labs, automation, engineering and R&D where market leaders are still in the mid and smallcap space.
However, just for the sake of earning a quick buck and fear of having missed out should not make one participate in the ongoing trend. Though it is encouraging to see the market breadth expanding, one needs to take cognisance of the fact that quality can't be compromised just because something is available cheap.
Q: Do you think the IT sector is going to be a star performer over the next few years? What is your pecking order that can boost the portfolio?
Even up until 10 years ago, IT sector contributed less than 5 percent to the country's GDP. Today, it contributes nearly twice as much. India's IT industry is advancing from growing demand for digital services as the pandemic accelerates the global shift toward automation. The criticality of technology to most companies' operations across verticals, along with a further rise in digital and cloud spend post the pandemic, is likely to drive growth recovery. Robust deal pipelines, positive management guidance and cost-cutting measures are few reasons to be optimistic. Reasonable valuations, free cash flow, return ratios and payout metrics also make the sector look attractive from a longer term perspective. We have been bullish not only on IT services but also niche companies operating in engineering and R&D, automation, etc.
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