Market chasing earnings, where to invest?

Anand Shah, Head- PMS & AIF Investments, ICICI Prudential AMC. says the market is just chasing earnings. It is chasing the reality of corporate India and within that segment, what has been doing very badly for a decade, which is manufacturing and manufacturing related businesses, the B2B businesses, have been doing strongly.

The strength in the market is mesmerizing. There is a long list of why markets should go down. And hardly a few pointers left where the market should go up. But markets are focusing on those few pointers, not the long list why it should come down.

This has been the story practically for the last three years. We have been living in a very tough macro environment, be it Covid wave one, Covid wave two, and more recently, the Russia-Ukraine led inflationary environment where the energy price and everything went up. So, macros have not been easier for the last three years.

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But bottom up, the earnings trajectory, for the index as well as the broader market, has been very, very strong. Smallcaps and midcaps have been performing. Within that, earnings growth is also much stronger than what we are seeing in largecaps. That is also reflecting more of a micro and a domestic story, whereas the macro remains tough. So, to that extent, the market has not been very euphoric. It is just chasing earnings. It is chasing the reality that corporate India and within that segment, what has been doing very badly for a decade, which is manufacturing and manufacturing related businesses, the B2B businesses have been doing strongly.

Where are you investing in this market? Where are you picking your spots?

We have been seeing a lot of FII selling within the largecap banking segment. So, despite fundamentals remaining strong, earnings coming off fairly strong, the stocks have been subdued. To that extent, the valuations have become very attractive. So, banking remains the top pick among the many sectors. But outside that, there are many segments within metals and in auto ancillaries in manufacturing, industrial capital goods, again in manufacturing – are the areas where we have been positive.

Outside that, there are many bottom-up ideas in sectors which have been stressed for a while, telecom being one, airlines being another, hotels. This is the sector which almost for a decade, decade and a half, did not make reasonable money. So the supply is limited, both in airline and telecom. I do not see new players entering either telecom or hotels.

I was just looking at your contra strategy in the PMS and your weight for financial services is 33%, manufacturing is 32%, manufacturing allied is 21%. None of these really seem like a contra strategy right now because all of these names are something which people are quite bullish about on a consensus basis. IT or even other names might be a bit of a contra strategy. How do you define financial services and manufacturing as a contra theme?

Indeed, I mean, these are stocks we have picked up in our portfolios three years back and definitely they were not in flavour at that point of time. But even when I look at them today, the risk reward in these select stocks still remain fairly attractive. The way we define contra is the stocks where actually the implied growth is much lower than what we believe would be the growth in times to come.

In that context, the select stocks that we own today, still remain fairly favourable from a risk reward perspective. I spoke about banking a while back. The earnings trajectory remains strong, balance sheets have been very strong and asset side performance has been fairly resilient.

What about the outlook in the power and energy space? How have you looked at the kind of announcements that we have seen on this ?

For any country to do well, energy is of paramount importance, as the Indian economy remains strong and that reflects in the power demand growth. Again, as I spoke about hotel, airlines, I think this is another sector which I would want to believe has been under investment for a while. We were at one point of time, adding thermal capacity very, very strongly.

At some point of time, we reached the power surplus stage. Since then, there has not been many new, especially coal-based power plants coming through. So we are reaching a point where we are now in a little bit of a deficit. And this deficit will only widen. This is one sector, which comes within the manufacturing allied businesses, the utilities. We have been fairly positive on this sector. And even the allied sectors like cap goods, which provide new power plant capacities, both in thermal as well as in renewables, they also remain attractive for us.

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