Valuation excesses have worn off and are in a comfort zone, thanks to a 45% rise in Nifty earnings over the past 18 months, according to UTI AMC chief investment officer Vetri Subramaniam. In an interview, he tells Siddhant Mishra that financials and auto are the sectors with good prospects while pharma and IT offer opportunities too. Excerpts:
Have valuations reached reasonable levels?
Also read: Recovery from bad investments: How Peter Lynch, George Soros bounced back from failure
As a result, some of the valuation excesses have been removed. Nifty valuations today are in the comfort zone, which would be +1 or -1 the standard deviation. They are still not at or below the LTA but it’s not like markets trade at LTAs. We would not lose too much sleep over valuations; they’re not bargain-basement attractive, but not blinking red in terms of being expensive either.
Which sectors are showing signs of promise at this point?
We look at it from the valuation angle as this is what determines opportunities at a sector level. First, the two areas–in which valuations are mid-cycle rather than cheap but the overall trajectory appears favourable–are financials and automobiles.
Second, if we go by the valuation itself, the overall pharma/healthcare sector looks attractive after having disappointed for quite some time. Valuations have also become reasonable for global cyclicals, despite nothing major happening in terms of excitement.
Third, the sector for which valuations were at extreme levels 18 months ago was IT. A significant part of the valuation excesses have since worn off. While it’s not attractive per se, we would nevertheless use any opportunity in IT to add rather than stay away from.
Rates are being said to have peaked, thanks to back-to-back pauses. Is it the right time to consider duration funds or is it better to wait till we have clarity on rate cuts?
The RBI was early in terms of first removing liquidity and hiking rates. There’s no doubt inflation has been slightly higher than the MPC’s comfort territory. It’s not like inflation was being pulled up by super strong demand or due to a tight labour market, which may be true of the western world.
Also read: Rupee was range-bound last week, could see low volatility going ahead; traders eye May inflation for cues
At this point, the most attractive part of the rate curve is more in the 1-3 year territory, and not so much at the long end as the demand-supply dynamics are still challenging. It is not clear by how much rates can come down in a hurry, given that the RBI’s inflation target is now at 4%. Just rates coming back within + or -2% zone may not be reason enough for them to start cutting. We seem to be in a pause mode rather than a cut mode.
May saw the highest redemptions from equity schemes for almost two years? Is that a worrying trend?
Not at all. The scale at which the industry has grown over the last five years only shows investors have reposed their faith in long-term investing, especially through SIPs.
As an industry, we must continue to engage with them and hand-hold them through the journey. Month-on-month fluctuations may vary but broadly, investors are giving signs of staying on for the long haul.
How do you see the consumption theme pan out in the backdrop of elections?
We don’t necessarily see any linkage between the two; our perspective is to think more longer-term with respect to consumption cycles. What has been visible since before the pandemic is that the top end of consumption is holding up better than the lower end.
That is not to say consumption is strong, it’s just fine. Looking at economic data, especially at a company level, consumption has struggled through the past two years. It is a bit of a challenging territory. While businesses certainly have long-term growth prospects that we are positive about, the valuations don’t give you any comfort at this point.
Within consumption, auto is the only area where we see a cyclical recovery play out. Valuations are a challenge at a market level too as many sectors don’t offer a margin of safety.
FPI flows have shown a strong revival in the past two months. Do you see the momentum continuing?
FPIs are not one set of people but distinct categories of investors. There are sovereign wealth investors, long-term stock pickers and hedge funds. Categorising FPI flows into one basket is a disservice to foreigners.
It’s difficult to project flows on a monthly basis but as long as you believe India as an economy stands out as it has a variety of reasons to grow faster, a well-regulated market and good-quality companies in which corporate governance is not an issue, flows of capital will continue coming into this market. The long-term trend is that this is an attractive market for foreign funds because of the structural growth.