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Taher Badshah of Invesco on pockets in mid and small-caps where valuation comfort exists

Opportunities exist in cyclical sectors and old economy stocks that are of the B2B variety

October 19, 2021 / 09:45 AM IST

Stock markets rallied massively in the last one-and-a-half years. Taher Badshah, chief investment officer of Invesco Mutual Fund, who is known for his contrarian style, decodes how market valuations are currently perched. He is more bullish than bearish on markets at this stage. In an interaction with Moneycontrol’s Jash Kriplani, he says markets are not only bouncing back from COVID-19 disruptions, but also due to an overall economic revival. He also touches upon the likely tapering of stimulus measures by the US Fed and its potential fallout. Edited excerpts:

Are equity markets over-valued with the Sensex at 60,000?

The market valuations are not on the cheaper side, but India is in its early stages of economic recovery. There are two factors contributing to this revival.

One, we are bouncing back from the pandemic and the other part of the recovery is what we were expecting at the start of 2020 itself. This expectation had built up on the back of non-performing assets (NPA) in the banking sector stabilising, inflation and interest rates being under control, government’s focus on reforms, rural markets doing well, etc.

Hence, the recovery could be lot stronger than what is being anticipated right now. We could now see multiple triggers kicking in such as pent-up demand coming back, industrial activity picking up, manufacturing activity recovering, and the economic cycle seeing a revival. There is also a commodity boom taking place, which can possibly impact the Indian economy in terms of inflation and import bill. But this can benefit commodity companies that have not done well for the last several years, which will also contribute to corporate earnings. But still these are not valuations that offer a good entry point, as there can be downsides from these valuations.

Close

Investors have deployed close to Rs 8,898 crore in mid and small-cap funds thus far in 2021. What are the prospects for mid and small-caps at this point?

Despite the market run-up, there are pockets within the mid and small-cap spaces that are still reasonably attractive. Some of these opportunities might be in cyclical spaces and old economy stocks that are of the B2B variety (ancillary companies catering to needs of other businesses).

Small-caps tend to do well when the economy is on an uptick. This is because small-caps tend to be more leveraged to the domestic economy and benefit more from the upswing. So, their ability to surprise on earnings, profit margins, profitability, is a lot higher than large-caps. The valuations of B2C or consumption-facing companies look stretched and expensive. It is still not a market where you can’t find ideas, even though the opportunity set is narrowing as we go along.

Could inflation play spoilsport in the market rally?

Inflation is getting an upward push due to commodity and energy prices now, whether it is oil, natural gas or coal. On the other hand, there are comforting factors such as dip in food inflation. The likely Kharif production, food grain stocks and softening of global food prices could help.

So, we should not see domestic inflation getting out of hand. More importantly, we should see headline inflation softening further in the next few quarters from the August reading of 5.3 percent. The expectation is that inflation should first trend towards the 4 percent mark, before it starts to go up. So, we don’t think inflation would necessarily come in the way of Reserve Bank of India’s monetary policy, whether it is do with interest rates or liquidity management.

How will price rise impact corporate India?

Corporate inflation might behave differently because all these energy-related costs will seep-in somewhere, so sectors with the power to pass on the price increases would be better-placed.

In this context, companies with some sort of pricing power will be valued more. But if the top-line growth for corporates turns out to be stronger, then the impact on profit margins will not necessarily weigh on earnings.

Will the unwinding of stimulus by the US Fed impact Indian equity markets?

US Fed’s tapering of stimulus is clearly coming and it is not far away. However, it looks like it would be sensitive about how it carries out the unwinding. It would ensure a soft-landing scenario.

So, what is today $120 billion-odd stimulus a month, would gradually wind down to $50-$30 billion before it actually turns negative. It would also want to stand along with normalisation of economies, till it reaches pre-COVID status. Also, given that this is a healthcare-related crisis and not a financial crisis, the Fed would be a little more accommodative in general and not necessarily hurry into it.

But yes, this tapering is likely to unfold in the next 3-9 months. If the tapering comes along with improvement in US’ own economy and thereby the world economy, the market would be willing to take it in its stride. The market focus would then shift back to companies’ fundamentals rather than excess liquidity in the markets. However, if growth still doesn’t come back, but liquidity is there, the potential correction in the markets might be much less intense.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Oct 19, 2021 09:45 am

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