Equity market not yet overheated, says Validus Wealth CIO Cheruvu

Validus Wealth, a next generation private wealth advisory platform focused on Indian high networth individuals (HNIs) and UHNIs, sees a 20-22 per cent CAGR in Nifty 50 companies’ earnings in next three years, said Rajesh Cheruvu, Chief Investment Officer of the firm.

This is significant because on an average, Nifty 50 companies had recorded less than 5 per cent CAGR in their earnings in last ten years, Cheruvu told BusinessLine in an interview.

“Secondary markets have been giving returns in India. How long secondary markets will hold good depends on factors like earnings trend and outlook. Secondary markets will do well so long as earnings outlook are not fizzled out. Our markets are already pricing-in healthy earnings outlook,” he said.

Cheruvu highlighted that Indian equity markets are trading above the average multiples seen post the global financial crisis. “We are trading premium for a reason. There has been re-rating of the benchmarks because of huge liquidity, better earnings outlook, increased infrastructure spend. This time, the markets are driven by domestic retail money and not the FII hot money. The earlier market peaks in 1999, 2007, 2010 and 2017-18 were largely FII-driven,” he added.

Cheruvu also highlighted that the macro-economic outlook was quite healthy from a 3-5 years perspective. “We expect to see over 7 per cent CAGR in GDP growth in next five years. There are also sector-specific tailwinds and favourable aspects like PLI programme, import substitution and digital way of doing things that will help,” he said.

IPO frenzy

Asked if the ongoing IPO frenzy and the strong pipeline is a pointer to a bubble-like situation, Cheruvu replied in the negative. “We should not be worried about short term rush or bubble. I am not seeing this as short-lived phenomena as markets are driven by retail participation. Many investors are making listing day gains and even those IPOs that don’t perform well on listing day, end-up doing well after a month or a few weeks of listing,” he said.

He highlighted that the number of demat accounts and trading accounts had gone up in the last 18 months.

Cheruvu said that lot of money is flowing into India — not so much of FPI money into listed markets, but certainly in the form of Foreign Direct Investment and private equity deals.

When asked about how clients of Validus are looking at Indian equities, he said, “Clients are increasing allocations and are optimistic about equities. If you had asked me this question a year back, most of the smartest ultra-HNIs were expecting 8-10 per cent equity returns with aversion to take risk. Last ten years, equity returns were sub-eight per cent on a pre-pandemic basis. Now, their appetite is back with earnings outlook getting better, capex being up and also, thankfully, we don’t have too many bad apples in corporate balance sheets. Appetite has started coming back and people are ready to take risks There is good interest for platform companies. Interest of UHNI in private market transactions is also quite high.”

On the possibility of unwinding of loose monetary policy by global central banks in coming days, Cheruvu said that all eyes are on August 26-28 Jackson Hole meeting and US Fed Chairman’s speech.

Both the European Central Bank and the US Fed might not unwind in less than one year, but they might start slowing down their monetary easing, he said. “It will be one year plus for tapering to start, but incremental liquidity could be halted in next few months,” Cheruvu added.

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