Shyamsunder Bhat, Chief Investment Officer at Exide Life Insurance, says that financials is one sector that is yet to fully participate in the rally, and if the Nifty50 were to rally to the level of 20,000, this sector must deliver since it contributes to more than one-third of the Nifty 50’s weight. 
 
Bhat, who has a rich experience of more than 27 years, has worked with two mutual fund companies. He was part of the launch team at Tata Asset Management Ltd, where he spent 10 years. He then worked with Principal PNB Asset Management for more than six years.  

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In an interview with Zeebiz’s Kshitij Anand, Bhat says that our investment strategy focuses on identifying stocks that have the potential of delivering longer-term investment returns. Edited excerpts: 
 
Q) When do you see the US Fed raising rates and how will it impact Indian markets? 

A) We could see a tapering of liquidity by the US Fed, commencing in the next few months, and concluding sometime during calendar 2022. Interest rate hikes, though, may happen only in calendar 2023. 
 
The 10-year US treasury yields have inched closer to the 1.5% level in September. While it is expected that the US Treasury yields may continue their upward trend, however, the impact of the tapering is not likely to be as much as in the previous round of tapering. 
 
The US dollar is expected to strengthen against a basket of currencies, including the Indian rupee. However, India’s strong level of forex reserves, and comfortable current account deficit, could result in the extent of depreciation in the Indian rupee being limited. 
 
That said, a potential reversal of FII funds from Indian equities definitely exists, but the reason for the same would be more due to the significant outperformance by Indian equities this year relative to other emerging markets as well as to developed markets. 
 
The reversal could also be due to concerns about the high valuations of Indian equities (now at an all-time high premium to Emerging Markets, at about a 70% premium compared to an average of 40% premium). 
 
Historically, we have seen allocation shifts by FIIs between various markets after periods of sustained outperformance, and we might witness this once again. 
 
Q) Which sectors will take Nifty50 from 18000-20000 in near future? 
 
A) Market sentiments have remained positive with some domestic developments such as an accelerated vaccination drive (and while not yet ruled out, the fears of a third wave receding as the incremental number of Covid-19 cases not spiking post the gradual opening up in most States), strong commentary from corporates from most sectors(except for maybe auto), a relief package for the telecom sector (which should also bring relief to some of the banks!), and indications of a pick-up in the privatization/disinvestment efforts. 
 
GST revenue remained above Rs 1 lakh crore mark for the past 3 months, indicating the underlying economic growth post the peaking of the second wave. 
 
Revival of the monsoon with a strong September should help the overall monsoon being close to the long-term average, and this is a relief. 
 
An overall revival in the consumer sentiment and demand in H2, including the festive demand, will be keenly watched. However, surging crude oil prices (near a 3-year high now of close to $ 80 per barrel), inflation and impending tapering of liquidity in the US (and in India as well) are factors to be watched, apart from of course, the expensive valuations in some of the stocks. 
 
Financials: 
 
In terms of sectors, our highest weight is in financials, and this is one sector that is yet to fully participate in the rally. Therefore to answer your question, this sector is the one which is most likely to be the contributor, if the Nifty 50 were to rally to the level mentioned by you since this sector contributes to more than one-third of the Nifty 50’s weight. 
 
Weaker credit growth and concerns on the impact of the pandemic on asset quality could possibly be two reasons for this sector lagging the overall market. 
 
Strong cash-flows of FY21 and 1HFY22 has facilitated de-leveraging and therefore large industry credit may remain muted; however, the thrust on manufacturing through PLI schemes, could eventually lead to a demand for such credit. 
 
Demand for credit continues to be strong, from the MSME sector and from retail segments. The concerns on the impact of the pandemic on asset quality appear to have been fully factored into the valuations. In light of the above, this sector appears to be well-positioned presently, for further upsides. 
 
Pharma & Auto: 
 
We are overweight pharmaceuticals and automobiles (the latter is a contra call based on reasonably attractive valuations, and we are therefore positive longer-term despite supply-chain disruption for some inputs, and cost inflation).

 
Cement & Real Estate: 
 
We are also positive on the cement sector, which has been another relative recent underperformer due to soft cement prices and rising input pressures, but the long-term prospects bode well with a recovery in capex, infrastructure, and real estate sectors. 
 
We are now marginally underweight FMCG and IT sectors, having booked some gains from a valuations perspective post the recent strong up move in some of the stocks in the FMCG sector and the midcap IT space. 
 
Q) What are your views on the impact of the fallout of Evergrande on the Indian market and sectors in specific? 
 
A) China’s Evergrande crisis appears to be a fallout of the liquidity tightening by their Central Bank over the past few months, to control the excessive leverage and expansion in their real-estate sector. 
 
It is expected that the Government intervention could ensure a managed restructuring and limit the financial contagion effect. The linkages with India were, in any case, likely to be limited. 
 
However, the bigger issue to be considered is the impending slowdown in China’s GDP in the second half of the year, and the likely impact of the same on global markets. 
 
A curtailment of the real-estate sector (a sector that has a high contribution to China’s GDP), steel production and power generation, are likely to result in slower growth in China, and also potentially supply-chain disruptions in specific sectors. A cooling-off of some of the commodity prices, and a weakness in trade, are other potential possibilities. 
 
Q) What is the investment strategy of your fund in picking winners? 
 
A) Our investment strategy focuses on identifying stocks that have the potential of delivering longer-term investment returns. 
 
Apart from the corporate governance track-record and the management bandwidth to the extent, we are able to assess, some of the other criteria include the company’s position relative to the competitive environment in the industry that it is operating in, external growth drivers (including Government policies), margin-levers, 2-year earnings growth and valuations relative to longer-term growth prospects. 
 
Q) How are FIIs looking at India? They have turned net buyers after 5 consecutive months of being net sellers at least in the cash segment of the Indian equity markets? 
 
A) FIIs have generally been buyers in the Indian equity market in calendar 2021 barring a couple of months, though to a much smaller extent than what was witnessed in calendar 2020. 
 
They have been buyers of around $1.2 bn in September. Domestic institutions, too, have been generally buyers during a larger part of this calendar year (after having been sellers during calendar 2020 and in the first couple of months this year) and were buyers of around $800 mn in September. 
 
Indian equities had an extremely strong upward movement in August, higher than that witnessed in the global markets, and a positive movement even in September when most other global markets witnessed a correction. 
 
However, post the recent considerable outperformance, we may see some allocation rotation out of India.  We are already witnessing some risk-off in the derivatives segment; the cash segment could follow. 
 
Q) What is your call on markets for the next 6-12 months? 
 
A) The Nifty 50’s valuations are already at 20-21xFy23 earnings. With a 20%+ earnings CAGR over Fy20-23, earnings growth till Fy23 now appears to be well-factored into the valuations of the Nifty 50 per se, as the subsequent growth (Fy24) could revert to a growth in the teens. 
 
Stock-specific valuation differentials continue to exist, both within the Nifty 50 constituents and in the broader market. 
 
Therefore, from here on, while the longer-term positive outlook for our equity market remains intact, the near-term outlook is cautious on the Nifty 50 or S&P BSE Sensex indices, as the near-term upside could be limited.   
 
We could continue to see sector rotation, similar to what we have already been witnessing for the past several months as these indices were grinding higher. 
 
However, as the valuations of individual sectors, too, catch up with the market, we would see a further stock-specific focus over the next 6-12 months, greater than that witnessed over the past year. 
 
Q) The market is rising on the backdrop of expensive valuations when compared to history? How does the number stack up for Nifty as well as for mid, and small cap indices? 
 
A) India’s stable macro factors including a favourable current account position, political stability, strong GDP growth in absolute terms as well as relative to most other large economies (even post the recent moderation of expectations, still expected to be close to double-digits) helped the sentiment. 
 
Additionally, strong earnings growth expectation over the next 2 years, has possibly contributed to flows from all segments of investors -- FIIs, domestic institutions, and a significant direct participation by retail and HNI investors. 
 
Over the past 6 quarters, we have seen a unidirectional rally with large cap indices doubling. But, midcap and smallcap indices have significantly outperformed the largecap indices over the past year. 
 
The accuracy of forecasted earnings is relatively lesser for the constituents of the midcap and smallcap indices, but these indices do appear to be at a premium in terms of forward valuations, to large-cap indices presently.   
 
The forecasted earnings growth, too, is higher for midcap and smallcap indices. However, we continue to maintain that a focus on the quality aspect while evaluating and investing, in mid-cap companies is essential, regardless of the market levels. 
 
Q) The market is giving plenty of opportunities to investors to make money, but how should one avoid losing money in this market?   
 
A) As a general principle, investors should keep their age, income, and risk appetite in perspective, along with their time horizon for investments. 
 
The importance of risk appetite and time horizon is even more significant when markets are trading at a record high. Therefore, at the present elevated levels of the markets, investors should commit large amounts of incremental investments in equities only if they have a longer-term horizon (5 years+). 
Active asset allocation funds are an option that investors can consider rather than pure equity funds at this stage. 
 
We are in the midst of a multi-year earnings growth in Nifty-50 after a gap of several years, and therefore while we could see interim corrections, longer-term returns from equities are likely to be reasonable, but short-term volatility and downside is definitely possible. 
 
Since we have seen a significant up move over the past 1.5 years, and a significant participation from retail investors (of whom several could be first-time investors), it is important to brace oneself for some erosion of gains, and for absolute losses if one is making purchases at present levels based on momentum or based on earnings/price expectations which may be difficult to be met. 
 
With most IPOs over the past year having yielded handsome returns, and with a large IPO pipeline ahead of us, there is a possibility that many IPOs might be priced to perfection without much money left on the table for investors, particularly if the equity market does not continue to move unidirectionally higher. 
 
Q) Has your holding in cash increased amid the recent run up in prices? 
 
A) While we are cautious on the Nifty 50 index, we continue to maintain very low cash levels in our equity funds and are fully invested, since we remain positive longer-term, particularly on the individual stocks that we own.   
 
However, we have been cutting our equity weight over the past couple of months in our hybrid funds. We do remain overweight equities in these hybrid funds, but the overweight position is now modest compared to the very high overweight levels which we were maintaining over the past year, and this reflects our stance. 
 
However, we are cautious on valuations in some segments of the market, such as some of the mid-cap IT stocks, and some consumer stocks (FMCG as well as durables) and we have accordingly reduced our exposure to these. 
 
(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)