You'll do well hanging on to existing investments

Betting on unlock theme is premature as this covid variant is deadlier than the previous version, says Satish Ramanathan. The MD & CIO, Equity, JM Financial AMC, discusses with ET Wealth expectations on stock marekt valuations, forecast on interest rate regime and more tips for investors in this interview. Is there worry in the stock market about the ongoing upmove being very sharp?No big worry, but there are small ones. First, the Indian market is overlooking the negative impact of the second covid wave and the earnings growth projected for 2021-22 is little ahead of the ground reality. Second, we are probably at a higher range of valuation and therefore, I don’t think this is the best time to put in lots of fresh money. Investors can hold on to existing investments. We may get into a time correction, which we have to bear and the market will take a new direction from there.How long do you expect this high valuation regime to continue?The average PE expansion has been happening over the years now. For example, the average market PE now is much higher compared to 2008-13.This PE expansion is due to ultra accommodative stance taken by the US Federal Reserve and other central bankers and the resultant fall in interest rates. Due to the low rate regime followed by the RBI, domestic investors also don’t have too many investment opportunities. This high valuation regime will continue as long as the interest rates remain at these low levels.Considering growing inflation, how long can the low interest rate regime continue?Central banks across the globe are allowing inflation at the moment because it is transitory and not structural. However, they will be forced to take action if inflation becomes structural or gets out of hand. If the interest rate spikes,—possible in the next one year— we could see some volatility and that will be the best time to start investing fresh money.RBI usually acts when inflation increases or there is a threat to the rupee. What are the chances of a run on the rupee?Chances are limited now because the government’s trade deficit control efforts are yielding results. Oil consumption is expected to be under check because many people won’t travel around unnecessarily when petrol is at Rs 100 a litre. Gold import is also low. Rupee stability is also helped by FDI inflows, which is around $ 70-80 billion a year and $ 600 billion of forex reserves.When do you think private capex will pick up?Private capex can be split into two —from listed and unlisted companies. In the listed space, massive balance sheet repairis happening now. For example, several large steel companies have already brought down their debt levels during the last two financial years. Companies have also renegotiated and brought down interest rates. This balance sheet cleaning process will continue in 2021-22 and probably in 2022-23 as well.Muted capacity utilisation is another reason why listed companies are keeping their capex pending. Private industries usually start thinking of new capex only when utilisation goes beyond the 75-80% levels. Therefore, the capex from listed companies will take place after two years. It will start first in brown field expansion and green field expansion may happen later.While capex from listed players are muted, capex is happening through foreign direct investments (FDIs). The trend of setting up factories in areas like textiles, consumer durables, and other labour intensive segments, for domestic market as well as exports, will continue for the next 3-5 years. Though this may reflect in the stock market, the economy will benefit. PLI may induce some capex as well from existing companies and large international firms.The second wave of covid has started subsiding. Where should one bet now?Betting on the unlock theme now is a bit premature because this variant is deadlier than the previous version. Further, unlike March 2020 when markets declined by 33%, this time we are at an all-time high. There won’t be unlock trade like last year because the impact is far deeper this time. Last time the animal spirit came back fast, but may take longer to resurface because the psychological scar is also deeper this time. Self-employed groups have also been affected and there will be a ripple effect of that. Since we still need to maintain social distancing, hotels, cinema, etc may not open in a hurry, which are large employers of semi-skilled work force. Even if you want to do unlock trade, keep only a small portion of the portfolio for it.Where do you see deep value?Pockets of value in the classical sense now are in commodity, mid-cap manufacturing and PSU stocks.When do you see the PSU value unlocking?Piecemeal divestment destroyed investor confidence. The government is heading towards strategic divestments now. Value unlocking is possible with potential restructuring or privatisation. If a few are privatised, it can evoke good sentiments that can influence other PSU companies. After all, these are large companies with large assets on ground, large cash balance and large dividend payouts. They may not get premium valuations because of historical issues and for being a government owned company. But they can easily come back to fair value from present very low levels.What about the long term themes?We continue to be bullish on the export theme. IT, pharma and engineering fall into that theme. This segment will become more prominent in coming years. Speciality chemical is another promising segment. Consumption theme is the next one. However, the valuation here is rich. Third one is domestic services like in healthcare, food distribution, etc.

from Economic Times https://bit.ly/3cErMyg
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