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Don’t try to time the market, instead stay invested for longer to benefit from a strong economic cycle, says Roopali Prabhu, Chief Investment Officer of Sanctum Wealth. A two-decade veteran of financial markets, Prabhu sees value in large banks and select auto companies. And while IPOs are the rage irrespective of the company’s fundamentals, Prabhu says she is perfectly fine to pass up opportunities where the valuations don’t make sense.
Here are excerpts from an e-mail interview to CNBC-TV18.com:
The market is acknowledging a broader recovery in the economy and changing sector participation based on incoming data. As is commonly said, equity markets are a slave to earnings and, corporates delivered decent earnings in Q1FY22 despite the second covid wave. We believe the full year corporate earnings growth forecast will be met, as demand recovers in the upcoming festive season. Further, the vaccination pace is healthy. Overall, we think that risk could emanate from external rather than domestic factors. When that happens the recovery tends to be quick. Also, it is impossible to time markets consistently, hence the best alternative is to ensure that investment horizon is long enough that one can reap benefits of a strong economic cycle. Since stock returns converge with earnings growth we are focused on staying invested in companies with longer growth runways. Even in this market, we think there are plenty such opportunities.
At the beginning of the year, we had identified housing, manufacturing and exports as themes that are have multi-year value creation potential.
The housing sector has many catalysts in our view. Over the past 7-8 years, the sector bore the brunt of demonetisation, the credit crunch due to the NBFC crisis, RERA implementation and so on. On the positive side, the sector has seen consolidation of projects into the hands of financially sound developers and RERA has contributed in instilling confidence in buyers. Further, low interest rates, time correction of prices, preference for upgrading house as more people work from home, policy support for affordable housing have resulted in increasing demand. We believe residential real estate, building materials, cement and metals are beneficiaries of improvement in the housing sector. Operating leverage is also likely to support material companies.
The manufacturing hypothesis is now widely known and accepted. Multinational companies (MNCs) de-risking supply chains away from China, policy actions like the Production-Linked Incentive (PLI) scheme, the “Make in India” initiative are also supportive of manufacturing and exports. Auto ancillaries and specialty chemicals are beneficiaries of both domestic (import substitution with lower Chinese competition) and export demand. Many of these companies already have existing capacities and relationships with global MNCs. Even after the impressive growth of these companies, in most cases their global market share is still low and hence that gives growth a longer runway. Industrials are also likely to do well given the boost to the manufacturing sector.
Tactically, we find value in the largecap banking space, since they are growing faster than the systemic growth. They also have a strong balance sheet to absorb any shock with double digit capital adequacy ratio and are garnering lion’s share of incremental business. Select automobile names are also beginning to look interesting from slightly longer term perspective as this sector has been impacted by shortage in semiconductor chips and raw material inflation which are likely to get resolved over next six months and offers reasonable margin of safety at current levels.
2021 has been an exciting year for IPO investors so far. The long queue of IPOs and record amounts of fundraising, which is the highest in last two decades, reflect investor confidence. Getting access to new age businesses that can compound for long term is indeed alluring. However, one should also remember that disruptors can also be disrupted, rather quickly. Pagers to mobiles, malls to ecommerce are examples. And hence valuations are tricky. It is also pertinent to note, more than 60 percent of the money raised has been used by promoters and investors to liquidate their holdings through IPOs and it is not uncommon for these investors to want to maximize the value out of their stake sale. Our approach to IPOs remains the same as evaluating other companies – scalability and longevity of growth is key and by extension, assessment of whether these companies can sustain their competitive advantage is important. We are okay to forgo opportunities where we can’t make sense of valuations.
On a one year basis, Nifty has outperformed every major equity index in the world. But our country weight in various global indices is still very small and these weights are key determining factors of global flows. India Inc is fundamentally better placed today than any time in the recent past. We are also one of the larger emerging markets in the world and 3rd largest in terms of GDP based on Purchasing Power Parity basis. Our market offers opportunities in companies across sectors, with high return on equity and is also moderately leveraged. Besides, regulatory intervention in China, is expected to force global investors to reconsider their allocation across emerging markets, and we could be beneficiaries of that flow in both segments — Foreign Direct Investment and Foreign Portfolio Investment. Therefore, we think that India is favourably poised fundamentally as well as tactically.
India is not in early stage of recovery anymore. We have seen a steep rebound in the last three-four quarters. As a result, most of the sharp earnings upgrades are behind us. Going forward returns in the medium term will primarily be driven by earnings growth. Therefore, the key is to be invested in fundamentally sound companies with a clear path of growth. In steep market corrections, insulating portfolios is very tough, but a sound selection will help accelerate recovery. The only more important thing than building a sound equity portfolio, is to remain invested in the asset class through the correction.