This Is A Good Time To Make A Higher Equity Allocation
We seem to have been overcoming the wall of worries. How do you see the current market from that perspective?
There has almost been a 10% correction, hence there has been a correction in valuation, but they are not yet still cheap. Valuations are in the fair value zone. On earnings, there could be still some further downgrades, but to our mind, that will be limited. Markets are not attractively valued, but the 10 percent correction has made valuations better. The premium valuations in mid- and small-caps have converged to some extent to the large caps. But we see markets remaining range-bound.
There was a bit of a scare on crude prices. What’s your view on the same?
The fragility on account of rising crude prices, which also affected the rupee, was exposed. The vulnerability to oil will definitely be there. But as the supply-demand dynamics is being taken care off, and some of the supply issues are being addressed by Saudi Arabia, oil prices have more or less corrected. That also helps the rupee to stabilize.
NBFCs are facing some headwinds. How do you see that impacting the markets?
Domestically, the liquidity issue and the possible deleverage, which could keep pressures on the market. We think the market might remain range-bound, as the pressure is coming from NBFCs now looking to address their asset and liability maturities. I think the maturities will get corrected through the EMIs that they receive rather than further expansion, so the growth will take a breather. There will be some impact on the markets, as that factor brings in volatility, but at the same time, I don’t expect this to be a systemic issue. The market share will shift from NBFCs to banks. Some banks have sound liability franchise, and NPA resolutions have been helping. So you could see some shift happening from NBFC to banks, who will be willing to buy out NBFC asset portfolios too. All these things take time. Till such time the whole issue is behind, there will be some volatility.
How much of the pain is still left, if there’s pain left at all?
If on the global front, tensions escalate, then there could be some pressures. The US has been doing well on growth, but next year’s growth may not be so good. The risk-off trade is taking place, and in general, if the flows into risky assets is taking a breather, India cannot remain in isolation. We are also getting into an election mode, so the noise levels will remain high. That may have some impact, but we really can’t predict this.
Are you seeing any market rebounds in the coming time?
The catalyst for the markets is earnings growth. This year we have a favourable base effect. FY 20 we don’t have any trigger as far as the base is concerned. One has to review the earnings growth in the next few quarters. Therefore, for now we are saying that there is a case for a range-bound market movement.
How are you positioning your portfolios?
When we look at portfolios, we are trying to protect the downside by going for companies which have sound and sustainable cash flow generating and which also have a high return on capital employed. You would also look at sizing your position accordingly so that you are balancing the risk. That is more important than timing the markets and looking for whether there will be any correction. Typically, when an investor is choosing to put money in our funds, he is taking a call on our funds on how much he wants to invest. So any further alteration in asset allocation by increasing cash levels in the portfolio is not how we would look at it.
What is your overall allocation to cash?
Do I have a maximum of 4-5 percent allocation?
Which sectors are you overweight on now?
IT and pharma remain to be overweight in the portfolio. Most of the early gains from re-rating we have seen in the last one year, but even now that is one sector which has strong cash flows, and hardly any leverage on the balance sheet. The sector still has about 3.5-4 percent free cash flow yields. If the market gets more volatile that is a good place to remain invested. In pharma, more or less worst is behind us. I also like corporate banks. We are at the fag-end of the NPA recognition cycle. Provisioning might still continue, but banks will stand to benefit specially where they have a strong liability franchise.
How should investors position their portfolios?
For somebody who is underexposed to equity, this is a good time to make a higher allocation. We should not be overly concerned with the oil prices or the fall in the market. This fall makes the overall valuation in the market look a lot better than the situation six months ago.
