fbpx

Should you Invest in Equities Now?

Webinar Invite ASK Nimesh Mehta

Nimesh Mehta – Director & Country Head – Business Development & Products, ASK Investment Managers

1. As an equity specialist, what’s your house views on equities at this point of time especially when nifty crossed 16k mark?

We have been sharing views on the market and justified continued upsides given that the market as yet did not fully reflect the discount rate change and the earnings growth. From the pre-Covid peak of Dec 19, we have witnessed earnings grow by over 15% and a discount rate change of over a percent which increases the present value by 15-20% on different assumptions. At the same time, a quarter of Covid-related business loss, impacts valuations by just around 1 to 2% for surviving companies. Put together, markets would be fully valued if the indices were higher by say over 35% from peak. At present, after 4 months into the new fiscal, markets are still only around 33% higher from Dec ‘19 peak. FY23 earnings are 15% higher than FY22 and passage of 4 months should reflect as another 5% upside, if markets have to track earnings. In case the monetary policy stays accommodative for longer in India and globally, or if the Covid 3rd wave is benign, the market could see sharper upside.

This implies, that there is still upside in the market, practically tracking earnings outlook of FY23 over FY22, taking into account some increase in interest rates and some disruption in case the 3rd wave impacts us. While there is upside in the market, going forward expect secondary market to consolidate for some time as IPOs are expected to be the focus. Midcaps do offer more upside vs large caps, and this period of consolidation/ step back should prove to be a good period to build portfolios for long term investors. We do believe that the easy money is behind us and investors would do well to take the services of quality focused managers.

2. How does the current stock market level compare with current company valuations?

The Centre for Monitoring Indian Economy (CMIE) study of top 3000 companies does show that the top 900 companies are doing relatively better than others. If we track the performance of the midcap space and the large cap space from FY07 till date, we find that midcaps are still trailing behind. It is seen that in period of strong economic growth, midcaps do relatively better, and the current period when the world economy is reflating after the covid setback, is one such period. When we look at the earning momentum of our universe which focuses on high quality and high compounded growth businesses, over the next 2 years, I find that the earnings compounding of the space below Rs.40kcr market cap is materially higher than that of the larger companies. Actually, in the high-quality space this has been the case in most of the years clearly showing that higher quality space leaders are performing relatively better. We believe that stock market performance follows earnings performance and hence leaders of these new emerging spaces should do well going forward.

ask

3. Is it a good time to invest in equities?

The policy environment has been changing for the better with better access to domestic market on import duty protection and encouragements in the form of Productive Linked Incentive (PLI) scheme rollout which is benefitting industry after industry. Most of the players who are benefitting are in the sub Rs 40,000 crs market cap range. We are focused on the electronics space as this space is seeing the largest benefit under PLI. China +1 sourcing is benefitting Pharma, Chemicals and API industries while there is some PLI benefit here as well. Demand for IT services is strong and midcaps in the space are performing better than larger peers. Valuation support is also there. If we track the performance of the midcap space and the large cap space from FY07 till date, we find that midcaps are still trailing behind. It is seen that in period of strong economic growth, midcaps do relatively better, and the current period when the world economy is reflating after the covid setback, is one such period. When I look at the earning momentum of our universe which focuses on high quality and high compounded growth businesses, over the next 2 years, I find that the earnings compounding of the space below Rs.40kcr market cap is materially higher than that of the larger companies. Actually, in the high-quality space this has been the case in most of the years clearly showing that higher quality space leaders are performing relatively better. We believe that stock

4. Which are the top 3 sectors allocation in your PMS portfolio?

Midcaps do offer more upside vs large caps, and this period of consolidation/ step back should prove to be a good period to build portfolios for long term investors. In terms of sectors, we are focused on IT and Financials, amongst larger profit pools as these spaces have higher predictability and sustainability. Amongst smaller companies, Chemicals/ APIs continue to hold promise to us.

5. What have been the most significant changes you have made in your portfolio in the recent past and what are the key drivers for these changes?

Over the last 12-18 months, we have increased weights in Chemicals, Pharmaceuticals, Finance, Technology & Telecom, while reduced weights in Consumption. Our weight in Consumption sector was at its peak in Mar 2020, where we were of the opinion that valuations had become higher (beneficiary of flight to safety trade in the early days of lockdown). Hence we decided to pare down our positions in Consumption sector. Given our positive outlook on China + 1 strategy, sectors like Chemicals and Pharmaceuticals were the key beneficiaries, where we increased our weights. Finance was one of the sectors, which was beaten down and was available at reasonable valuations, where we inched up our positions. Technology and Telecom were the sectors which were beneficiaries of the pandemic with improved outlook for the future earnings, where we increased our weights. Manufacturing sector is another place where we added positions from a bottom-up basis which were beneficiaries from the Government’s PLI schemes.

6. Bottom-up plays an important role in your sector selection – we would be very keen to understand your bottom-up view on sectors you see leading this bull market and why?

The policy environment has been changing for the better with better access to domestic market on import duty protection and encouragements in the form of Productive Linked Incentive (PLI) scheme rollout which is benefitting industry after industry. Most of the players who are benefitting are in the sub Rs 40,000 crs market cap range. We are focused on the electronics space as this space is seeing the largest benefit under PLI. China +1 sourcing is benefitting Pharma, Chemicals and API industries while there is some PLI benefit here as well. Demand for IT services is strong and midcaps in the space are performing better than larger peers. Valuation support is also there. If we track the performance of the midcap space and the large cap space from FY07 till date, we find that midcaps are still trailing behind. It is seen that in period of strong economic growth, midcaps do relatively better, and the current period when the world economy is reflating after the covid setback, is one such period. When I look at the earning momentum of our universe which focuses on high quality and high compounded growth businesses, over the next 2 years, I find that the earnings compounding of the space below Rs.40kcr market cap is materially higher than that of the larger companies. Actually, in the high-quality space this has been the case in most of the years clearly showing that higher quality space leaders are performing relatively better. We believe that stock market performance follows earnings performance and hence leaders of these new emerging spaces should do well going forward.

Leave A Reply