We won't be overweight on banks before we see earnings in January, says Mihir Vora of Max Life

Mihir Vora remains cautiously optimistic on the market. "The caution is due to valuations and growth uncertainty for India, optimistic is because there are some visible signs that consumption is reviving," he explained.

He feels the quarterly numbers have been a bit better, overall, but this is on a very low base of expectations. The key driver of positive surprises have been on the cost front as companies have saved on raw material and other costs like travel, advertising, while many companies have also deferred pay hikes and bonuses, leading to savings versus last year, he said.

The Director & Chief Investment Officer at Max Life Insurance said their overall the themes remained the same i.e. consumption revival, exporters and make-in-India plays. However, most of these have already become market favourites, which is reflecting in high valuations, hence they were trimming positions by booking profits and keeping some cash in the portfolio, he added.

Edited Excerpts:

Q: Do you think the market will get back to record high levels after US presidential elections, given the improving economic data points and earnings?

It depends on the outcome. If there is a clear verdict, then US markets may go up in the immediate future, taking the rest of the world along. If the election results are close and legally contested, then the final outcome may not be known for a few weeks – there will be volatility if this is the case. So, while there may be some knee jerk euphoria, the emergence of a third COVID wave in Europe and US may keep the recent economic recovery on a leash. Development of vaccine or a cure is when one would expect a more durable economic recovery.

Q: What are your thoughts on September quarter earnings season so far? Do you think the September quarter earnings season has given strong recovery indication?

The quarterly numbers have been a bit better overall, but this is on a very low base of expectations. The key driver of positive surprises have been on the cost front as companies have saved on raw material and other costs like travel, advertising. Many companies have also deferred pay hikes and bonuses, leading to savings versus last year. The other key positive was the commentary on asset quality by many of the large private sector banks. They have guided for much less provisioning for bad loans and restructured book compared to expectations. More specifically, the results were better than expectations for IT, pharma, banking, paints, cement and building materials like tiles etc, tyres & batteries.

However, as mentioned before, the positives are more on costs. The demand conditions are still uncertain, and it remains to be seen whether the uptick seen in October sustains beyond the festive season in November. In banking, more clarity will emerge after the disclosures on the restructured book emerge in the results for the quarter ending December, which will be declared in January.

Q: Have you reshuffled your portfolio after September quarter earnings season? Also what are those sectors which one should look for investment especially after September quarter earnings?

Overall we remain cautiously optimistic – cautious due to valuations and growth uncertainty for India, optimistic because there are some visible signs that consumption is reviving. Expanding central bank balance sheets and strong inflows into equity markets have kept the markets buoyant over the last six months, any reversal, on this may impact the overall bullish sentiment.

So, while we remain bullish on IT and Pharma, we have reduced positions as valuations have become a bit stretched after the sharp outperformance of the past 6 months. We have increased exposure to banking though we are still underweight and reduced exposure to the energy sector. Overall the themes remain the same i.e. consumption revival, exporters and make-in-India plays. However, most of these have already become market favourites, which is reflecting in high valuations, we are hence trimming by booking profits and keeping some cash in the portfolio.

Q: Do you think one should start investing in infrastructure sector given the easing lockdown measures and labour coming back to cities for work?

We need to be very stock specific in this segment as stretched government finances and stagnant private capex are paving headwinds. Road building is one of the few bright spots.

Q: Auto sector rallied sharply in last few months amid improving data points. Should one still start buying in the sector or wait for major correction?

Auto sector has shown sharp recovery in sales because of pent-up demand after the lockdown, as well as a low base in the previous year. We would like to wait till the end of festive season to be more constructive on the sector. We have reduced our overweight in the sector after the good run-up. Tractors continue to do well, there are some early signs or commercial vehicle demand reviving (on an extremely low base). Cars and passenger vehicles have done better-than-expected but it remains to be seen whether demand sustains beyond November. Overall, valuations in auto are not that expensive – if demand sustains, there is scope for further re-rating of the sector.

Q: India's recovery rate has been increasing and fatality rate has been improving. But reports indicated that India could see second wave in November and December. Do you think there could be a lockdown again and the second wave will impact growth?

We don't expect a complete or country-wide lockdowns but there can be a localised lockdowns as we have seen in Europe and UK as cases rise. However, we don't expect a sharp reaction of equity markets like we witnessed in March as the disease is now not a complete unknown and treatment protocols have been developed over the last six months which will keep fatalities lower than before. The recovery of the Indian economy will not be a sharp V-shape like we have seen in the US and elsewhere due to lower fiscal support. FY21 GDP growth will likely be around -8 percent and FY22 GDP will probably reach FY20 levels on the low base of FY21.

Q: Should one start buying banking stocks especially after September quarter earnings or wait for couple of quarters?

Most of the large private sector banks have raised good amounts of capital in the last 5 months and have been aggressively provisioning on the stressed asset book. Recent commentary on asset quality in housing, secured retail, and corporate/MSME loan restructuring numbers have been better-than-expected. However, clarity would emerge in January after the quantum of restructured assets becomes known. However, given that the sector was beaten down and there are some signs of the worst being over, we have reduce our underweight in the sector. We will not be very overweight on the sector before we see the results in January.