Do you see a big change in leadership actions, etc.? Are you upgrading certain sectors?
Obviously the results season is over, so far the results have held up pretty well. In fact, during this whole period of Covid, Indian companies have done well in terms of profits. We have seen profit increases over the past few quarters. Economic activity has also picked up quite strongly and high-frequency indicators are now above pre-Covid levels. The catching up in economic activity was therefore quite significant.
In addition, the rate of vaccinations per day has increased, which is another positive element. The way we look at the markets, one of the main drivers of the markets over the past year has been the earnings upgrade cycle.
Overall, we believe earnings will continue to remain fairly robust for FY22. If you look at consensus earnings, the consensus is building on around 30% earnings growth for the Nifty companies for the full year and we think that’s a very healthy number. However, from a valuation perspective, they are clearly trading at levels above the long-term average multiples.
So some of the key things that will drive the markets from here on out; a) the holiday season and the recovery in demand there. b) The rate of income increases if the holiday season turns out to be good. Then c) we may start to see a resumption of earnings upgrade cycles around the second half of the year. This will be another key factor to watch out for.
From our perspective, some segments we are positive on include domestic cyclics which are clearly geared towards economic recovery. We believe that this time around, investment and manufacturing growth are likely to continue to drive overall economic activity in the country and policy initiatives are geared towards that as well.
Gradually, we are seeing signs of recovery in capacity utilization. While in the short term most of the work will be done by the public sector, in a few years private sector investment will also pick up and this is already visible in a few sectors such as metals and cement.
Thus, from a portfolio perspective, we are playing on domestic cyclics which include infrastructure, industrials, capital goods and banks. We also have defensive bets in the portfolios. So it’s kind of a dumbbell strategy. Defensively, we’re looking at IT and some selected names from pharma and consumerism in the portfolio.
There has been a lot of talk about consumer stocks becoming frothy and overvalued. Are you taking a contrarian stance?
No, for us it’s more of a defensive bet. We have specific equity exposures. We’re saying some of the impact you’ve seen on the consumer discretionary side is fading. We are clearly aware of the valuations that are clearly expensive in the consumer space.
We are attentive to valuations, but we have some specific exposures to equities rather like a defensive bet on the consumer space. While our main overweightings would be more in national cyclicals, more in industries, banks, mainly private sector banks, infrastructure names, cement and capital goods.