Daily Voice | Single most important factor that will guide market is liquidity, says Anshul Saigal of Kotak Mahindra AMC

Anshul Saigal of Kotak Mahindra AMC

Anshul Saigal, Portfolio Manager & Head-PMS, Kotak Mahindra Asset Management Company, thinks the time is ripe to build for the future. The market has not done much in the past 18 months and some segments have seen significant de-rating, offering an opportunity as the growth trajectory remains intact, Saigal who has over 16 years of experience in the capital markets, says. But stocks that depend on rural strength may underperform if the monsoons are weak.

For Sehgal, the biggest market-mover, however, remains liquidity. "If central banks reverse their tightening stance, equity markets should see tailwinds, in anticipation of future improvement in economic conditions," he tells Moneycontrol in an interview. Edited excerpts:

Which are the sectors that fit your value investing principles?

Investing in businesses which trade at a discount to their intrinsic business value is value investing in our judgement. Typically, discounts appear in two forms: 1) Discount versus asset value of the business, ie value of real estate/ subsidiaries, etc embedded in the business not being fully reflected in the market value of the stock, 2) Discount due to growth of the business not being fully reflected in the market value of the stock. It is the latter category that interests us more. We seek businesses where growth is not priced into the stock.

Markets have gone nowhere in the last 18 months and that has thrown up opportunities. Many market segments have seen price and time correction in this period. However, their growth trajectory remains unimpaired. Further, there has been a severe polarisation over the last few years, where certain specific market segments (eg pharma) have witnessed significant de-rating. Hence opportunity has emerged in these segments.

We believe financials, industrials, pharmaceuticals, consumer durables, soft commodities, information technology, etc are some segments where value has emerged.

For the patient investor, this is a period to focus on magnitudes and not frequency ie stocks may meander around similar levels for some time, forcing many investors to lose interest. However, investors should disregard this dull period and focus on the (magnitude) upside to downside ratio to decide on equity allocations. This may be a period to accumulate opportunities and reap rewards over the ensuing few years.

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Do you think El Nino will be a big risk to the markets, though Consumer Price Index (CPI) infaltion fell to a 15-month low?

The occurrence of EL Nino since 2000 was in the years 2002–03, 2004–05, 2006–07, 2009–10, 2014–16 and 2018–19. In each of these periods (except 2006-07), there was a marked deficiency in rainfall across the season. Over the last two decades, the years of EL Nino have produced the maximum rainfall deficiency.

El Niño years in the past have had a negative impact on food production. Among the constituents, oilseeds followed by pulses are affected more by monsoons. While cereal growing areas are supported well by irrigation, carry forward of low wheat buffer does warrant a watch. Rice buffers are also believed to be low. Pulses and oilseeds have been prone to a sharp rise in price during periods of crop weakness.

Given this makeup, chances are that food price inflation may remain tight. Additionally, rural consumption may not see tailwinds generally expected during pre-election years.

Due to these factors, El Nino may have an impact on certain market segments, which depend on rural consumption for growth ie two-wheeler, tractors, consumer staples, etc. However, if past history is any guide, El Nino rarely impacts the markets as a whole.

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Which are the factors that will guide the trajectory of the market? What kind of returns do you expect in FY24?

Markets move in cycles which are a play on valuations, liquidity and general economic conditions. Through cycles, economic fundamentals take a dip post a liquidity tightening phenomenon. Markets adjust valuations downwards in anticipation of this weakness.

Conversely, when economic conditions weaken, central banks support the economy with liquidity and markets move up in anticipation of strengthening economic conditions.

We recently witnessed a phase of severe liquidity tightening wherein the US Fed funds rate went from 0 percent to 5 percent in a matter of 12 months. The backdrop of this tightening was high wage/goods inflation and overheated economic conditions. Global Markets corrected in anticipation of weakening economic conditions and subsequently, economic growth expectations are being tempered across the globe.

The single most important factor that will guide future market direction will be liquidity. If central banks reverse their tightening stance, equity markets should see tailwinds, in anticipation of future improvement in economic conditions.

Forward interest curves suggest that the meat of liquidity tightening is behind us. With inflationary pressures easing, central banks are expected to pause going forward. Further, market participants are positioned for market weakness ie short positions are high and institutions are holding large cash amounts.

With any pressure on markets, short positions may get covered and cash may be put to use. Hence, such market positioning caps downsides. As a result, we anticipate markets to remain within a band of +/-10 percent over the next 12 months.

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Is the high-frequency data indicating a slowing of economic activity in the developed economies but not in India?

Some recent headlines coming from India are as follows:

a) India's overall exports cross an all-time high of $750 billion in the 75th year of independence
b) Services trade surplus, led by robust exports, is helping balance India’s trade deficit
c) India's factory output rises to 5.2 percent in January 2023, surpassing estimates
d) FASTag toll collection grows 46 percent to Rs 50,855 crore in 2022
e) India's defence equipment exports reach Rs 16,000 crore this year
f) Indian Railways reports highest-ever loading for fiscal 2022-23
g) India's manufacturing PMI rises to a three-month high of 56.4 in March
h) Domestic passenger traffic jumps 74 percent YoY in February, says DGCA

Contrast these with global headlines

a) US manufacturing near three-year low; casts a shadow over economy
b) Euro zone factory downturn deepened in March, PMI shows
c) US banks' failure pose risk to global growth
d) US consumers starting to struggle to pay off credit cards
e) Missed mortgage payments swell in housing bellwether New Zealand
f) Can't get my money out of China, India better investment option: Mark Mobius

It is evident that there is a stark contrast in economic activity in the developed world vs India. Also, the mood of the respective regions is quite contrasting – while the world is feeling optimistic about India, there is a shadow of uncertainty surrounding the developed world. Momentum begets momentum and, so far, the wind is in India's sail.

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Is it time to pick technology stocks, which have been highly volatile in the past few quarters?

Between 2013-2019, the IT index traded at an average PER (price-to-earnings ratio) of 20x, for average growth of 11 percent and a return on equities of 21 percent. Come Covid, due to remote working requirements, IT stocks outperformed and PER rose to 38x in CY21. In CY20/CY21, EPS growth was 6.5 percent and 17.8 percent, respectively.

Given that expectations were lofty, stocks did not meet expectations in CY22 and the index corrected 26 percent. Despite this correction, stocks are above their 10-year average valuations. While some tech stocks have become attractive in valuations, we believe some more consolidation is likely before the sector turns.

Which are the sectors likely to underperform in the current financial year?

If monsoons are weak, stocks that are dependent on rural strength may underperform. Richly valued segments where competition is heating up eg paints & other building materials may witness consolidation.

Do you expect the Federal Reserve to consider a last rate hike or take a pause in May?

There is a saying in India – the elephant has passed and the tail remains. The same is true for the US Fed's interest rate hikes. Even if further hikes are expected, those are marginal in comparison to the last 12-15 months' hikes.

At a time like this, we would focus less on rate hikes and more on identifying bottom-up opportunities where earning power and future growth trajectories remain intact.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.