Thursday, December 9, 2021
HomeMarket Live UpdatesDon’t be overtly bearish but be a little cautious now: Prasun Gajri

Don’t be overtly bearish but be a little cautious now: Prasun Gajri

“While we could see some sort of expansion in the economy, I would reserve my judgment on whether it is going to be a large-scale multi-year kind of an expansion or whether it is going to again be a little bit more varied and volatile kind of an expansion,” says Prasun Gajri, CIO, Insurance.

Last one year when economic data and indicators were not very good, the market was galloping ahead. Now, when the economic indicators have started improving and a whole lot of corporate earnings are in line with estimates, it appears that the market is taking some time off. What is your view?
No, I do not think there is any surprise on that to be honest. Clearly, when the markets were moving up, we were seeing constant earnings upgrades for two-three quarters in a row. For the last two quarters the earnings upgrades have stopped and earnings are coming in line with whatever assumptions the market had. So, that is one area one has to be a little bit cautious about.

The other piece is that while the economic data is turning out to be positive, along with that, we are seeing inflation. Yesterday’s print in the US is obviously a little bit worrying from the market’s perspective and puts into question whether this high inflation trajectory is transitory or does it have a more permanent angle to it? That also brings into question the accommodating stand of the central banks. We have seen unprecedented accommodation by the central banks across the globe. Now this kind of inflation numbers and reasonably strong growth could mean that the central bank will start pulling back on accommodating stand.

We have already seen tapering starting though that has been well broadcast and the numbers are very much in line with what the market anticipated. So, there has been no big market reaction as was anticipated, but overall these are some of the worries markets have and given that the markets are in a range-bound situation, I believe this is healthy for the market. One cannot have the market moving up continuously. That is not healthy for the market. Some sort of consolidation is always welcome and the market is going through that phase at this point of time.

We have the highest inflation in three years but at the same time, we were surprised why US markets did not really crash big time. But at the same time, the contributors of that numbers — all the key commodities barring oil — have actually eased off. Shipping freight rates have come down 20-30% in the last 15 to 20 days. So peak inflation perhaps may be behind us. What is your view now that the disruption is normalising now?
On the commodity side, we sense some sort of normalisation happening even on the freight trades. We are starting to see normalisation happening across the globe. However, on a year on year basis, it is still pretty high. The challenge is that so far the market believes that this is a transitory issue but if it sustains at these levels, there is a bit of fear so I think that inflation may be more permanent in nature and that is keeping the market in balance.

We are not seeing a big correction but at the same time you are starting to see a bit of cautiousness emerging in the market. So, it is going to be balancing out in the short run till we get a little bit more conclusive evidence of which way we are heading on inflation, interest rates and central bank action.

Where do you stand on the argument that even if some inflation comes back, it will be good news because it confirms that growth is coming back also? The capex cycle is taking off in India, corporate balance sheets are healthier and we may be looking at three to five years of economic expansion.
That is clearly a bull argument and I would believe that partly. It could be true but I do not see complete evidence of that as yet. Clearly the signs of corporate capex are not visible as yet. Some minor signs are there but in totality, we are not seeing anything come up, the bank credit growing or large scale capex coming through. One has to be cautious in terms of how things pan out in a situation where energy prices have risen even if they stabilise at these levels. That is not very good from an Indian economy perspective.

Third, the assumption is that this pandemic is completely behind us and there are no after-effects of the pandemic on overall consumption. I would reserve my judgment on that. One has to be a little bit cautious on that front as well. So while we could see some sort of expansion in the economy, I would reserve my judgment whether it is going to be a large scale multi-year kind of an expansion or whether it is going to again be a little bit more varied and volatile kind of an expansions.

Certain segments of the economy and certain segments of the population have suffered significantly. How will they behave over the next couple of years remains to be seen. I am not quite sure about that kind of unbridled optimism. At the same time, we will continue to watch the data and as long as it plays out in line with expectations, we are fine. We are not saying that we are overly bearish on the market. It is just that given the state of the market, the state of the economy, the state of the data points, it pays to be a little bit cautious at this juncture.

How did you analyse the management commentary?. When we speak to PSU banks they are talking about the large scale provisioning ending probably ending now. A period of write backs, asset quality improvement and all of that, is perhaps starting. How did you analyse the quality of management commentary more than earnings this quarter?
Two-three things came out from management commentary. One is the margin pressure given the input cost escalation. There is a mixed view on growth. Some parts of the economy seem to be doing well while others are not. I would view it as a little bit of a mixed commentary rather than a completely bullish commentary.

Having said that, part of the PLI scheme, the fact that the banks’ balance sheets have been corrected, does put into place an enabling environment for growth. Is it sufficient for the capex cycle to come back and growth to be very significant? I do not think so. It is an essential condition to have when the banks’ balance sheets are definitely better. They can grow.

But one has to be clear that we have not seen that kind of growth. The banks’ balance sheets have been improving for a while and that has been the market view as well. But still the banks continue to struggle for growth. So it is a good starting point. Whether it will happen or not, only time will tell and we will watch the data clearly.

One hopes that it happens and we get into a multi-year growth cycle on the capex front as well as the overall economic growth front but I would say it is a little bit early to take that kind of a call. One is tempted when one sees the market and the mood it is in to take those kind of steps to justify the market situation at this point of time. But I would reserve my judgement and wait it out for a while. We remain positive but at the same time cautious and will continue to watch the data as it emerges.

Where do you find most valuation comfort in the event of a healthy correction playing out? In which sector or theme or elements do you see quality of earnings much more durable, cushioning the valuations?
We find the financial sector especially the larger banks quite comfortable on the valuation front as well as the overall growth prospects front. If one has to believe that some sort of a growth will definitely come back and the balance sheets are clearly improved, the provisioning numbers are going to be significantly lower as we go along over the next two to three years. The valuations are not out of league in terms of their historical valuations.

They are still quite reasonable and compared to the rest of the market, they look even more reasonable. So larger banks and financials are something which we clearly like. Then I find valuations to be reasonably okay in the pharma sector too. The sector has not really performed as well as one would like to, but at least the valuations are not completely out of the league as we see in some of the sectors.

Then there are stocks and individual companies where either the valuations in absolute levels are reasonable or are in line with the earnings trajectory of those companies. So there are pockets available, but within the entire market, clearly the most comfortable place seems to be the financial sector at this point of time, especially the larger banks.

How are analysing the export opportunity beyond the legacy large players like pharma or even technology? Some of the textile companies, chemical companies, machinery exports, capital goods appear to be a little promising. Have you started looking wider into export opportunity plays?
To be honest, no. Areas like textile, machinery exports are difficult to play, given that most of the companies would be mostly in the smallcap space which does not necessarily fall into our radar. But yes, that could be an interesting space if the trend continues on the export front and we have seen some of the best export months in the last six months for India. And if that trend continues, exports continue to grow and we get some more visibility we will probably look at it, but not so far.

How convinced are you on the argument that this is a structural growth opportunity for the technology pack? The commentary was good, growth guidance has been up, things are looking okay. Do you believe the argument holds for another two, three years or at least a few quarters?
We are seeing fairly broad-based growth in the technology sector, both the midcaps and the large caps continue to deliver good topline growth and the margin pressure, while evident, has not been as bad as the market imagined it would be. I would believe that if demand remains reasonably robust, these companies will have enough pricing power to be able to pass on any margin pressure. On top of that, strong hiring in the sector should help alleviate some of those things, especially on the attrition side, eventually leading to the margin side. So I believe that at least for the next couple of years, growth will remain strong. The question is now whether the valuations are already reflecting that or there is more to come.

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