Mutual Funds

Higher commodity prices could hurt markets in India, says Taher Badshah of Invesco MF

Satya Sontanam BL Research Bureau | Updated on September 18, 2021

Even as the bellwether indices touch record levels, Taher Badshah, Chief Investment Officer - Equities, Invesco Asset Management, says that it is an investable market for investors with good investment horizon, provided they keep their return expectations under control. He thinks continuation of rise in commodity prices is a bigger risk to Indian markets than any global event. Excerpts:

What is the biggest risk that markets are facing now?

At the global level, one risk is the rise in interest rates, which will come about in 2023. The other thing which they haven’t addressed yet is with regard to their exit from the accommodative stance. But it’s not going to be very disruptive, in my view. While the pace of monetary support will come down, it does not imply withdrawal of liquidity from the market because the accommodation is for a health-related crisis, and it’s not a typical economic crisis.

In India, the bigger risk to the markets is continuation of the rise in commodity prices that then starts affecting the profitability of corporates which, in turn, could hurt markets.

Besides that, irregular monsoon, fall of rural purchasing power and spending ability on account of the impact of the virus, if any, will be some of the other more domestic-oriented risks.

So, what would you call a key worry for an investor today?

Any change in the interest rate trajectory will probably hurt. The impact will be a function of the amount of rate hikes and if those rate hikes are a function of an outcome of a higher inflation, and that higher inflation is further an outcome of better growth, then I think markets will be able to take it in their stride.

But a scenario where there is lack of growth and interest rates move northwards is more worrisome. From here on, the returns from markets will be based on normal recovery in the economy. Investors need to keep their return expectations under control, and with good investment horizon, this is still an investable market.

Do you think the current valuations are justified?

If you were to rewind back to early part of 2020, for example, the markets were trading at about 20-22 times on one-year forward model. Today, the valuation on a one-year forward basis is similar.

And we are in a scenario where we are looking forward to a better earnings trajectory materialising over the next two years for the Indian economy as well as for the world at large. Also, in the last 12 to 18 months’ time, the interest rate table has gone down quite meaningfully across the world. So, it is so natural for valuations to move the other way.

I would define valuations as probably fair. Having said that, there are pockets where you see euphoria quite visibly, which one can probably avoid.

Which sectors look attractive in terms of valuations, and which frothy, as you just mentioned?

One sector you can at least act upon is financials. The entire banking space has probably become stronger than what it was about two years back. And yet, their valuations are probably below their own historic averages.

We also like industrials. This is a sector that normally can enjoy a meaningful amount of operating leverage if the economy is up over the next couple of years.

So what is apparently high valuations today may not necessarily be the case, if earnings turn out to be a lot stronger than what the market has forecast today.

Technology is another sector which we like for the top line and the visibility of growth despite higher valuations.

We have pockets of FMCG, consumer discretionary and consumer staples, which still have some bit of extended valuations and are not very easy from an entry standpoint.

But then there are parts like autos, which are kind of mixed. The sector as a whole has turned cheap on valuation. But we were struggling with a little bit of clarity on growth out there.

Within the auto ecosystem, we are better off with some of the ancillaries that are well-diversified.

Should investors avoid mid- and small-cap stocks due to their rich valuations?

Valuations problems are more acute in mid- and small-cap space.

Correction is possible in this space. But I don’t envisage the scenario, like in 2018 and 2019, when the mid- and small-caps were at discount by about 30-40 per cent to large-caps. That said, there will always be some opportunities. Once the economy opens up, these are the companies that will benefit.

Are the policy measures by the Government good enough to stimulate the economy?

With regard to manufacturing, for the last six to eight months, we’ve seen a fair bit of push, particularly with regard to extending the PLI to various segments.

On infrastructure, there is the resolve for National Monetisation Programme, which is infrastructure modernisation programme. From a policy perspective, there is no dearth of policy measures.

It is more about implementation. But we see enough push from the government to prioritise growth.

Published on September 18, 2021

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