Nifty is trading close to its long-period average and about 1/3rd of the Nifty companies are trading at very reasonable value attribution to long-term earnings.
Nifty is trading close to its long-period average, and the market is not fully pricing in the earnings growth potential for most of the Nifty companies, Pradeep Kumar Kesavan, Senior Vice-President, Institutional equity research of Elara Capital, said in an interview with Moneycontrol’s Kshitij Anand.
Q: Do you think investors are caught in this dilemma in the current market environment: What is looking cheap is not safe, and what is safe is not cheap?
A: At current levels, Nifty is trading close to its long-period average. If we segregate valuations into what can be attributed to the near-term earnings, compared to long-term earnings growth, about 1/3rd of the Nifty companies are trading at reasonable value attribution to long-term earnings.
This means that markets are not fully pricing in the earnings growth potential for these companies. The broader markets have experienced a much deeper correction and we believe that there are good pockets of value there.
Q: 2019 could well turn out to be a year in which many multibaggers could be born if someone holds them for a long term period or maybe less. What are your views?
A: I agree. The recent market corrections have eliminated a lot of fluff from the markets. As I mentioned before, we believe there are good pockets of value in the market that can provide healthy returns over the medium to long-term.
Q: How should investors make a case for investment at a time when everything is falling?
A: In the current environment, one should prefer companies that provide valuation comfort, earnings visibility, business resilience and/or exposure to the investment cycle.
Also, the ongoing challenges in NBFC, auto, etc. have tested the strength of the business models in these spaces showing investors which companies have business resilience and which don’t.
Q: Data suggests that funds are moving towards other EMs where there is no excess tax burden. Do you think the outflows have just started and it will only pick pace in the near future?
A: India has had a strong FPI flow this year if you look on a calendar year basis. However, it is right that in July, the trend reversed.
There are broadly two issues here, 1) the impact of “super-rich tax” and 2) overall attractiveness of India as a market in the prevailing global environment.
On the former, our view is that the impact will be temporary. Any signal from the government regarding reconsideration or changes will provide immediate relief.
Even otherwise, longer-term investors will take these additional costs into their cost/benefit calculation and take their calls accordingly.
We believe that the dovish stance taken by central banks across the globe is positive for emerging market flows.
Having said that, the recent macro-economic data points that we are seeing is not very positive in India. Any early signs of improvements will be taken up positively by FPIs given that valuations are reasonable in a good portion of the markets.
Q: According to you what could the government do to turn the sentiment on D-Street?
A: Some clarity on the “super-rich tax” and its applicability for FPIs would provide a direction to the market.
On a similar note, clarity around government’s proposal on overseas borrowing is also key as it would provide more room for private borrowers.
Q: Most of the auto names are trading with double-digit cuts so far in 2019 and below their respective 200-DMAs. Do you think this sectors could turn out to be the dark horse?
A: Our analysis showed that auto demand is likely to bottom in the next 8-10 months and post that the 10-year government bond yield should also bottom.
Given the recent drop in the 10-year yield and the expectations for rate cuts in August (assuming the transmission is better this time around), we will see the demand bottoming over the next 2 quarters and recovery from there.
Q: A recent report by World Bank said that India slipped to seventh slot in the global GDP ranking. Will govt be able to achieve the dream of becoming $5-trilion economy in the next five years?
A: A strong growth focus and reforms targeting land, labour and reduction in the cost of capital would be required for us to reach $5 trillion in the next five years.
As of now, among key engines of GDP growth—private consumption, private capital expenditure, net exports, and public infrastructure spending—only the last one is holding up.
We need all these cylinders to fire up to achieve growth rates required to become a $5-trillion economy.
Q: What is your advice to investors at a time when most of them would be thinking to cancel their SIPs and turn away from equity investment as portfolio returns are negative?
A: Our advice is always to stick to your asset allocations and be in the markets for the long term. Temporary cycles are unavoidable in equity markets but over a long period of time, they tend to outperform all other asset classes.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.