The outlook for the domestic economy remains weak, even though the equity markets seem to be presenting a rosy picture. In an interaction with Jash Kriplani of Moneycontrol, Krishna Sanghavi, chief investment officer-equities, Mahindra Manulife MF, says why it is difficult to chart the path ahead for economic recovery. He talks about the economic indicators he is closely tracking to look for signs of revival, and sectors that he is positive on. Excerpts.
What is your take on the present market valuations?
The markets appear richly valued compared to their long-term average. This has to be seen in the context of factors such as earnings base and index composition. We are looking at a tough financial year (FY21) for the economy. The earnings have got deferred by a year, but markets are still at similar levels. Over time, the composition of frontline indices goes through periods of churning. The richly-valued companies replace companies trading at lower valuations. This also makes the market valuations appear rich. However, when one considers FY22 and FY23 earnings expectations, valuations look reasonable.
Does the argument hold for mid and small-cap segments too?
The broad mid and small-cap indices look attractive. However, there are quite a few companies in these spaces that are richly valued due to expectations of high growth. On the other hand, there are also several companies quite cheaply valued due to weak growth expectations and in some cases high levels of debt sitting on their balance-sheets. We like companies in which the management has the capability of re-investing cashflows to take advantage of any growth opportunities.
Do you expect market volatility to continue?
Market volatility is likely to remain as there is still uncertainty over economic revival, even though we have seen strong support from governments and central banks across the world. The efforts to find a medical solution for COVID-19 are also afoot across the world. However, the rapid spread of the pandemic has pushed back the normalisation process. Also, US elections are around the corner, which may lead to more uncertainty.Are you seeing any early signs of economic recovery?
It’s a bit challenging to forecast when the economy will revive. COVID-19 infections are still rising in India and this has forced many state governments to retain some of the restrictions, which will delay the normalisation process. We are expecting some signs of normalcy in the next quarter (i.e., Q3FY21). We are keeping a close watch on electricity and fuel consumption, automobile sales (production, as well as purchases), cement production, credit growth, index of industry production, etc., to get a sense of how the economic environment is evolving. We are still at 75-90 per cent of where we were a year ago, on several of these indicators.
Will corporate earnings come back anytime soon?
This financial year can essentially be forgotten from the perspective of earnings and growth. As projected by various research agencies, the GDP (gross domestic product) is estimated to see a 10-12 per cent decline in the current financial year. We expect recovery to be gradual and GDP growth may possibly come back to FY20-levels over the course of the next financial year. Corporate earnings are also likely to come back in a gradual manner. We expect to see strong earnings growth in the next financial year for several companies, due to the low base created by COVID-19 in this financial year.
Which sectors are you positive on, and are there segments you are negative on?
We are more positive on sectors that are going to be the likely beneficiaries of the economic disruption caused by the pandemic. We are also looking at opportunities in sectors such as manufacturing, pharma and chemicals, which could gain from the government’s focus on Atmanirbhar Bharat. Also, we are positive on IT, as it is heavily dependent on global economy. The rural economy and agriculture can gain from the government’s agricultural reforms announced recently. We are relatively underweight on financials, infrastructure and consumer discretionary.
Can the upcoming US elections be a key trigger for markets?
As with any election, the outcome can either result in continuation or a change in economic and geo-political policies. Both the presidential aspirants have publicly expressed their positions on quite a few issues that matter to the global economy and markets. Therefore, markets will be focused on the outcome of the US elections.