Nifty can fall towards 22,000-22,500 level, which is a fair value for markets: Pankaj Murarka

Where do you see markets moving towards now?

We are in the mid-cycle of this bull market, which effectively means this bull market started in March 2020. The first day of the lockdown was the bottom of the equity markets. We are in the fifth year of this bull market now.

In the short term, around one year, the stock market has run ahead of fundamentals. The government had underspent in the first half of this year as we had the general elections in the first quarter. So, everything was on a standstill. I think they'll catch up in the second half.

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Having said that, the rural economy has slowed down for almost six quarters now, and urban consumption growth has also moderated. The economy is in the middle of a cyclical slowdown, and my view is that this slowdown will persist for another 3-4 quarters.

We are seeing the rub-off effect of that on earnings growth this year. At the start of this year, the consensus expectation was about 14 percent earnings growth, but we might end up this financial year with something like 7 percent kind of earnings growth.

The markets will spend some time in this consolidation phase. I still believe that the markets can go to that 22,000-22,500 kind of levels, which is a fair value, when I look from a 12- 18 month perspective.

The 22,000-22,500 level is our estimate of fair value for the market, and given the fact that we had such a ferocious move in the stock markets in the last 18 months, a consolidation of 6-9 months will make the markets only healthier and probably make valuations more aligned to the growth trajectory.

Midcaps and smallcaps have been relatively resilient. Do they still look expensive, or do you see the possibility of a further correction?

That segment of the market makes me feel most nervous. Unfortunately, that is one segment which has corrected the least. There's a lot of blind and unintelligent money in that space, which does not have a fundamental understanding.

A lot of these small-cap companies are trading at valuations which are expensive than large-caps. That is no longer sustainable. A lot of these companies, sometime in the future, will fail to meet investors' expectations, and a significant earnings disappointment will play out in that pocket of the market.

Renaissance India Next Portfolio and Renaissance Midcap Portfolio have good exposure to small-cap and mid-cap stocks. How are you managing the risk?

Across our portfolio, we are very conscious of quality. We've avoided the temptation of going down the quality curve in search for higher returns, which is what people end up doing in a bull market because poor quality stocks in the last two years have given better returns than higher quality stocks. We have kept the quality of the portfolio sacrosanct. That's one thing which differentiates us and I believe will help us whenever there's a shakeout in the mid-cap and small-cap segments.

What is your stand on cash right now?

We are fully invested as we are long-term investors and don't take cash calls. Our strategy is a  focused portfolios of 25 stocks. We're always investing in companies which are growing at 1-4 times the underlying earnings growth in the economy.

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More importantly, my experience of investing in India in the last 26 years has been that India is a paradise for growth investors. The pool of high-growth companies, which is available for growth investors has always kept on expanding. I've always had more ideas than money at my disposal to invest even when I was running large funds in my previous roles.

There are enough number of companies which are growing at a high rate even in a cyclically slowing economy.

The stocks or sectors that you picked recently...

At the start of the calendar year, we went overweight on IT. We think that the IT sector will lead the markets next year. Second, we've been underweight on financials for almost two-and-a-half years, but now we've increased our weights on financials, which is about 30-35 percent of our portfolio.

Among the largecaps, for example, after three years, we have bought HDFC Bank in the last few months. It was a stock which we did not own. They are undergoing a mega merger, but we think things are going in the right direction for them. They are in the transition stage and it takes 4-6 quarters for things to settle down. I think the franchise will emerge stronger after the merger completion.

You are also heavy on the pharma sector...

I'm super bullish on India's CRAM (Contract Research and Manufacturing) story. The pharma sector has secular tailwinds for the next 10 years because in contract research, there is a significant labour arbitrage, in terms of cost in the US or Europe.

There's a clear shift of research work from China to India, and that's a secular driver. Also, the US Biosecure Act, under which the US companies, in order to get federal funding, will have to get all their work out of China, is coming into place. This could give a boost to this segment's prospects. Effectively, that means a lot of this work will move to India.

Are you waiting for a further correction before entering or buying into a sector?

We've been underweight on the consumer sector for almost four years now. I think we will continue because my view is that, this decade, India’s growth will be led by investment cycle, and consumption will underperform. We've already seen a sharp slowdown in real consumption in the last two years.

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There could be some bounce or recovery in consumption, but in this decade or the next 5-6 years, investment-driven sectors, be it industrials, engineering, capital goods or real-economy related sectors, will drive India's growth and consumption.

What is your view on new-age companies which are again making waves?

We had bought Zomato at around the Rs 50 level. We continue to own that and we remain a patient holder. We also own InfoEdge (which has a 13.5 percent stake in Zomato). We've been holding that for almost five years now.

Within the whole internet or the technology space, we are invested in Paytm as well. The journey as a Paytm shareholder has been a bit rocky, but we still believe in the long-term investment case for Paytm. We believe that the future of finance is fintech and a lot of these fintech companies will challenge incumbent banks and financial services companies.

We remain extremely bullish on the whole technology space. At the same time, we have to be extra cautious while picking stocks in this space. It is a very competitive market. This is an area where the winner takes it all as the top three players in an industry or segment will make 120 percent of the industry’s profits, and the rest of the players will lose money.

Internet companies, as a whole, will form 10-15 percent of Nifty50 in the next five-seven years.

What impact do you see from Trump's tariff talk on India, both in terms of the economy and the markets?

We have to wait and see the real magnitude of tariffs, once he assumes office. The good thing is that the US's trade with India is very small -- about 4 percent of their international trade. At the same time, India is a now a strategic ally to the US. So, I don't see a direct impact and the US may not impose direct trade barriers on India. If anything, the US wants more trade and integration with India.

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Having said that, given that some of the countries will impose reciprocal tariffs on the US as well, it will effectively slow global growth. Hence, it will have a second-hand impact on India's overall growth.

India is a safe place for a 7 percent kind of real growth over the next four years. Many people aspire to see India growing at 9-10 percent in real terms. Those aspirations or expectations will have to wait for the time being. They're not happening in the next five years.