Market looks expensive as earnings are likely to dip in FY21: Mihir Vora

Mihir Vora, director and chief investment officer at Max Life Insurance
Flood of global liquidity, expansion of central bank balance sheets, near-zero interest rates, and massive fiscal stimulus in the developed world have fueled the market recovery from the recent low. MIHIR VORA, director and chief investment officer at Max Life Insurance tells Puneet Wadhwa that he expects the core money flow in terms of insurance premiums, NPS flows, EPF flows, and mutual fund SIPs to continue. Edited excerpts:

Is the rally seen since March 2020 low now likely to top out?

If we look at the traditional parameters i.e. price-earrings (P/E) ratio, the market looks expensive as earnings are likely to dip in fiscal 2021 (FY21). Even before the pandemic, India had growth issues, so a V-shaped recovery for India is unlikely, and getting to a 7 per cent plus growth rate on a normalised base will take a couple of years. However, the key drivers for the market in the near term is the flood of global liquidity, expansion of central bank balance sheets, near-zero interest rates, and massive fiscal stimulus in the developed world. The way markets and for that matter all asset classes have moved up in the past three months, it is clear that markets expect these policies to continue.

How comfortable are you with the valuations at this stage in the absence of earnings growth?

This flood in global liquidity allows us the luxury to look beyond the immediate future i.e. FY21 and focus beyond i.e. FY22. If the economy recovers next year, then profit growth will be sharp and valuations based on expected FY22 earnings may be justified to some extent. For India, in the immediate future, we may see some more fiscal stimulus which can improve sentiment further. So, in the short-term, markets will remain volatile due to a clash of two massive forces i.e. the pandemic-linked sharp slowdown and uncertainty on one side, and the massive policy action by governments and central banks to keep markets and economies afloat on the on the other.

How has the June 2020 quarter results season panned out for India Inc in your opinion?

So far, we have seen positive surprises in the IT and Pharmaceuticals segments. Banks and non-bank finance companies (NBFC) numbers have been as per expectations, but this is to be seen in the light of the fact that stress is not being recognised due to the moratoriums given out. Overall, companies have shown better operating margins than expected by cutting costs. Commentary and guidance are mixed. Some part of demand seems to be back in June, but July again seems to have flattened out. So, it is too early to take a big call – positive or negative.

Will India get an incremental share of foreign flows into equities as an asset class within the emerging markets?

Given the huge impact of the Covid-19 shock, it is imperative that central banks as well as governments continue with their liquidity and fiscal support. As of now, it looks like the accommodative stance will continue in the foreseeable future and real interest rates will be zero and even stay negative for a long time – this is usually a signal for asset price inflation. Emerging markets have underperformed the developed markets so far. In a liquidity-led chase for returns, we typically see rotation into underperforming asset classes. So, there is a case for increased flows to emerging markets. India, on a relative basis, is still the more exciting of the emerging economies given its strong consumption base and increase in companies seeking investment avenues outside of China.  

What’s the road ahead for domestic flows into equities? Do you see flows tapering off now as economic concerns weigh?

Structurally, the culture of channeling savings into insurance and mutual funds is now far more ingrained than 5-10 years ago. So, the core money flow in terms of insurance premiums, NPS flows, EPF flows and mutual fund SIPs will continue. The other positive factor is that, as discussed before, with global liquidity chasing underperforming assets, we should see foreign investors coming back in a bigger way going forward.

What has been your investing strategy? Would you look at public sector companies, especially those in the defence sector?

There’s still scope for selective stock-picking. The rural economy doing better than urban due to good monsoons and the significant support by the Government via MNREGA and other schemes. This makes the case for segments like paints, FMCG, motorcycles, cement, rural financing, gold finance etc. on the back of the Make in India theme and localisation of defense manufacturing. Further, exporters and outward-facing sectors may do better as the recovery in US and Europe may be more immediate compared to India due to the large fiscal measures by these countries. Thus pharmaceuticals, chemicals, IT software, auto-ancillaries may do well. Lastly, I expect privatisation of PSUs to gather momentum, which can throw up some interesting ideas.

Any dark horses one can bet on?

Segments which will remain under stress for a longer time are hotels, restaurants, malls, airlines, multiplexes, highly discretionary spending. If the market stabilizes at these levels and the growth uncertainty reduces, mid and small caps may outperform as they have lagged significantly over the past two years. However, it needs a continuation of benign monetary and fiscal measures.

How are you approaching the financial sector (banks, NBFCs etc) in the backdrop of the debate surrounding moratorium?

As of now, taking a call on financials is a tricky one. While valuations are optically cheap now, the quality of the asset book is not transparent. Now that there is no further extension beyond the second moratorium, the focus will be on the restructured book, but that will only get clear after March 2021. Till then, we will not have a good handle on the performance of the asset book. Hopefully, the guidelines for restructuring and disclosure of the same will be better. That said, within financials, there are still interesting pockets. The larger housing finance companies (HFCs) and gold finance companies should face less asset quality issues and valuations have corrected. Insurance – both life and general should continue to grow in a steady manner and so can retail brokerages and asset management businesses. So, these are some of the pockets within financials which could outperform.

Is it time to exit FMCG, pharma, specialty chemical sectors?

I would not yet exit these segments in a hurry. As discussed earlier, these fall into the themes which have better relative growth potential in the Indian economy viz. rural consumption, Make-in-India, and the overall export outsourcing trend.

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