“It is important to emphasize again that we are in the middle of a correction, but we are not in a crisis and hence equity will still remain an asset class to be in,” says Gurpreet Sidana, COO, Religare Broking Ltd.
In an interview with ETMarkets, Sidana said: “Sectors where input cost pressure and valuation discomfort exist, should be avoided and value investing should be a preferred methodology for investment.” Edited excerpts:
We have seen a volatile June – what is market factoring in?
Concerns highlighted are still lingering and market is still not out of the woods. Recent bounce back in the market was due to oversold conditions and some amount of respite was seen due to commodity basket cooling off.
Crude has again bounced back from lower levels, inflation is still high and war is still going on. However, a prolonged geopolitical tension doesn’t imply prolonged correction and inflation is due to supply bottle necks so these factors can change quickly.
We are in the sixth month of the year or 1H2022 – the first 5 months have been nothing short of a roller coaster ride for investors. What is your take on markets in the short to medium term?
We are in the middle of correction but the important thing to note is that we are not in crisis. The current year is panning out more like what we experienced in 2011 where after 2 years of phenomenal returns market witnessed a slow but steady correction.
In such markets, a stock-specific bottom-up approach should be adopted instead of a basket buying top-down approach.
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Sectors, where input cost pressure and valuation discomfort exist, should be avoided and value investing should be a preferred methodology for investment.
From the short to medium term, we will be governed by crude oil price movement and inflation trajectory which are not looking very encouraging at this point in time.
March quarter was relatively stable for India Inc. Do you see some disruptions, and earnings downgrade in the forthcoming quarters?
Rising interest rates and the global slowdown is not a good combination for any country. Yes, our domestic growth story is again taking a good shape which is evident from rising expenditure, higher capacity utilization, and increasing GST collections, however, earnings and markets don’t always go hand in hand.
So, even though we believe that there will be decent growth in earnings, the valuation may take a hit due to the global scenario as the concept of investment is always relative.
Having said that, some consolidation along with earnings growth would make our markets attractive valuation-wise in coming quarters.
It is important to emphasize again that we are in the middle of a correction, but we are not in a crisis and hence equity will still remain an asset class to be in.
Where do you see value in this market? Any sectors which you think have entered a buy zone after recent fall?
Firstly, it is important to realize that value is again a relative and subjective term and I would like to explain this using the banking sector as an example.
Many bluechip names in this space never show a meaningful correction and despite they do not offer any valuation comfort, participants have invested in them.
Value investing is just one aspect that had many takers in the past. Today, the market rewards growth.
For us, a high-growth story with moderate valuation comfort is the potent combination to go for.
Taking this into consideration — Banking, Cement, Auto, and selected NBFCs are the pockets where one should be overweight in the current scenario.
FIIs continue to offload stocks in Indian markets. What is the main reason — is it the fact that they are getting an exit, profitability, or it is just regular churn?
For FIIs currency movement plays a vital role in making investment decisions. Ever since the US FED started withdrawing excess liquidity from the system, we have witnessed strength in dollar.
To us this is one of the most important parameters to assign to FII’s selling as in a scenario when the dollar is appreciating. It makes investment sense to be in dollar-denominated assets.
FII selling is not due to any adverse macro scenario related to our country.
Do you see recession fears are real for global economies and India would also not be immune?
One should understand the difference between slow down and recession. As the US came out of crisis and the central bank became comfortable with growth, withdrawal of liquidity and hike and interest rates may slow growth which some of us may call slowdown — but we are not on a path of recession.
In a period of slowdown, India may continue to grow faster. However, theoretically, if one considers globally there will be a recession, then even we won’t be spared; but, are we heading into one? Our answer is no.
What should be the ideal portfolio mix for long-term investors especially the ones who have just started investing or trading in the age bracket of 30-40 years?
As we progress in our journey of technological advancement, the period of the investment cycle is reducing. In this sense, we are witnessing sharp upcycles and short downcycles as well.
Having some powder dry when the market gives mouth-watering opportunities is always prudent. 20% debt and 80% equity will be an ideal asset allocation mix with an option of going 100% equity if the market offers any major correction.
Since we are talking more from financial planning and a very long-term perspective, being in a high-growth space will give justice to the risk capital allocated in equities.
As one moves into a higher age bracket than within equity one can move towards a high dividend yield space.
What is the valuation metric which one should use to filter value picks excluding BFSI space?
It’s not a one size fits all concept. Different sectors have different metrics and within the investment cycle of one sector, there can be different metrics that should be used.
Like for cement valuation metrics is EV/ton and for auto stock, it is PE in normal or good times. But during a slowdown for cement one can resort to replacement value and in auto, one should shift to EV/EBITDA. Valuing a company is an art that should be followed scientifically.
What is the kind of rate trajectory you see from the RBI in FY23?
Today in a span of little over one month RBI has increased the interest rate twice. The first central bank increased interest rates by 40 bps and now by 50 bps.
With the government and RBI both making ‘controlling inflation’ their number one priority we believe the pace of hike in interest rate may moderate provided we don’t get any ugly shocks on the global front.
The government has started making necessary supply-side adjustments while RBI is trying to tame inflation by raising interest rates without letting growth suffer. So yes, we are in a rising interest rate environment, but this cycle may not be a prolonged one.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)