Underweight on pharma & IT, neutral on NBFCs: Mihir Vora, Max Life Insurance
In a chat with ET Now, Mihir Vora, Chief Investment Officer, Max Life Insurance, says a lot of liquidity is flowing into the mid and small cap space but overall valuations are not attractive any more.
Edited excerpts:
The sensex is marching towards 30,000. What is driving this rally? Is it just the liquidity push or would you say now clearly that our macros are on the mend and the fundamentals are looking pretty good too?
It is a liquidity driven rally, given the fact that India does trade on the higher side as far as rolling valuations like price to earnings ratio are concerned. This is because of the fact that even at 7-7.55 per cent, India remains one of the fastest growing economies and we are seeing very few pockets of this kind of growth globally. Moreover, not only is the growth story relatively good on the equity side but on the fixed income side also. The yields that we have currently and the relatively stable currency offers a decent amount of fixed income arbitrage to the foreigners. It is a function of both foreign liquidity coming into the country because of growth and yields and local liquidity flowing into the markets because there are no alternate options. The traditional savings instruments of fixed deposits, postal savings, real estate and gold are not really much. Fixed income rates are coming down and gold and real estate have not given much in the past few years. To that extent, this lack of options is pushing some money into the stock markets on a consistent basis.
What are you making of the sectoral trends and moves. Let us take banking for example which is something that is seeing a fair amount of disruption not only on the front that there is some radical overhaul of the NPA resolution mechanism coming but there is also talk about consolidation and then there are more lenders that are jumping on to the digital band wagon. Is that a sector which we have seen leading from the front? Will it continue to play the leader’s role?
On the banking side, we still prefer the private sector space vis-a-vis the public sector because the public sector space is still mired in NPA problem. We are very sanguine about the growth prospects not only for the private sector banks but also for the private sector NBFCs. We are in a situation where valuations are not cheap anymore. A lot of positive growth that we expect for the private sector banks and NBFCs has already been factored into the valuations and there is very little room for disappointment. Having said that, we are seeing credit growth slowdown in the last few months for the system as a whole and even some of the pockets of growth which we used to see earlier like microfinance, mortgages, etc, are beginning to show signs of deceleration. To that extent, while we are very positive on the growth of the private sector banking NBFC system, valuations are not comfortable, we would be neutral on this space at this point in time.
Let us talk about two areas where you have seen a little bit of weakness -- IT as well as pharma. A lot of it has got to do with the fact that you are seeing the rupee strengthen pretty sharply. On the back of that, would you say that we will see a likely earnings cut for both these sectors? Also, are you underweight?
In IT and pharma -- whenever the currency moves either ways -- there is always this debate about earnings cut. But I have seen the markets tend to discount these events very fast and we do not really expect the rupee to appreciate significantly anymore. So it is kind of pretty much there as far as the currency is concerned. And in IT and pharma, basically the companies have in the long term, performed on the basis of their own fundamentals and business strength. The currency issue has always been absorbed. People have improved efficiencies, cut costs. Salaries in the IT sectors have not grown for many years. So companies have always managed to use these levers whenever there is currency appreciation. Of course, when the currency depreciates, there is always an upside. I would not treat this recent strength in the rupee as a cause for concern for IT and pharma. But having said that, we are still underweight on both the sectors because they have other issues apart from the currency which is volume growth for the IT sector and the FDA issues for the pharma sector. We are underweight on these sectors but for different reasons.
The midcap indices have reached record levels. Many have argued about how you really need to get the stock right. Do you think that this rally is sustainable in this area?
It is never a wise thing to make a broad base comment on all midcaps and all smallcaps because there are literally hundreds of companies out there with different business models and valuations. Overall, things are beginning to look a bit frothy as far as that space is concerned. Again with the caveat that there is always stock picks available at all points in time and that is partly because of the fact that you have seen a lot of alpha generation by insurance, ULIPs and by mutual funds and this alpha has tended to come from both sector selection and midcap smallcap stock selection. Apart from the ULIPs and mutual funds, we also have seen exponential growth in the discretionary portfolio management space in India. So to that extent, these are all alpha chasers and by definition they tend to focus more on the mid and small caps. So we are seeing a lot of liquidity flowing into the mid and small cap space but overall valuations are not attractive any more.
Edited excerpts:
The sensex is marching towards 30,000. What is driving this rally? Is it just the liquidity push or would you say now clearly that our macros are on the mend and the fundamentals are looking pretty good too?
It is a liquidity driven rally, given the fact that India does trade on the higher side as far as rolling valuations like price to earnings ratio are concerned. This is because of the fact that even at 7-7.55 per cent, India remains one of the fastest growing economies and we are seeing very few pockets of this kind of growth globally. Moreover, not only is the growth story relatively good on the equity side but on the fixed income side also. The yields that we have currently and the relatively stable currency offers a decent amount of fixed income arbitrage to the foreigners. It is a function of both foreign liquidity coming into the country because of growth and yields and local liquidity flowing into the markets because there are no alternate options. The traditional savings instruments of fixed deposits, postal savings, real estate and gold are not really much. Fixed income rates are coming down and gold and real estate have not given much in the past few years. To that extent, this lack of options is pushing some money into the stock markets on a consistent basis.
What are you making of the sectoral trends and moves. Let us take banking for example which is something that is seeing a fair amount of disruption not only on the front that there is some radical overhaul of the NPA resolution mechanism coming but there is also talk about consolidation and then there are more lenders that are jumping on to the digital band wagon. Is that a sector which we have seen leading from the front? Will it continue to play the leader’s role?
On the banking side, we still prefer the private sector space vis-a-vis the public sector because the public sector space is still mired in NPA problem. We are very sanguine about the growth prospects not only for the private sector banks but also for the private sector NBFCs. We are in a situation where valuations are not cheap anymore. A lot of positive growth that we expect for the private sector banks and NBFCs has already been factored into the valuations and there is very little room for disappointment. Having said that, we are seeing credit growth slowdown in the last few months for the system as a whole and even some of the pockets of growth which we used to see earlier like microfinance, mortgages, etc, are beginning to show signs of deceleration. To that extent, while we are very positive on the growth of the private sector banking NBFC system, valuations are not comfortable, we would be neutral on this space at this point in time.
Let us talk about two areas where you have seen a little bit of weakness -- IT as well as pharma. A lot of it has got to do with the fact that you are seeing the rupee strengthen pretty sharply. On the back of that, would you say that we will see a likely earnings cut for both these sectors? Also, are you underweight?
In IT and pharma -- whenever the currency moves either ways -- there is always this debate about earnings cut. But I have seen the markets tend to discount these events very fast and we do not really expect the rupee to appreciate significantly anymore. So it is kind of pretty much there as far as the currency is concerned. And in IT and pharma, basically the companies have in the long term, performed on the basis of their own fundamentals and business strength. The currency issue has always been absorbed. People have improved efficiencies, cut costs. Salaries in the IT sectors have not grown for many years. So companies have always managed to use these levers whenever there is currency appreciation. Of course, when the currency depreciates, there is always an upside. I would not treat this recent strength in the rupee as a cause for concern for IT and pharma. But having said that, we are still underweight on both the sectors because they have other issues apart from the currency which is volume growth for the IT sector and the FDA issues for the pharma sector. We are underweight on these sectors but for different reasons.
The midcap indices have reached record levels. Many have argued about how you really need to get the stock right. Do you think that this rally is sustainable in this area?
It is never a wise thing to make a broad base comment on all midcaps and all smallcaps because there are literally hundreds of companies out there with different business models and valuations. Overall, things are beginning to look a bit frothy as far as that space is concerned. Again with the caveat that there is always stock picks available at all points in time and that is partly because of the fact that you have seen a lot of alpha generation by insurance, ULIPs and by mutual funds and this alpha has tended to come from both sector selection and midcap smallcap stock selection. Apart from the ULIPs and mutual funds, we also have seen exponential growth in the discretionary portfolio management space in India. So to that extent, these are all alpha chasers and by definition they tend to focus more on the mid and small caps. So we are seeing a lot of liquidity flowing into the mid and small cap space but overall valuations are not attractive any more.
