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investment themes: Mihir Vora on what themes to play in next 2-3 years & what to avoid

“The largecap universe is much more attractively priced versus the mid and smallcap universe. So if the market has to go up, it will be led by largecaps and within that, sectors like banking which had underperformed since Covid and are catching up now. Valuation wise, largecap make more sense today,” says Mihir Vora, Director & CIO, Max Life Insurance.

You track results, SIP data and what happens on a regular basis as far as flows are concerned. So your view on three things – why such a big FIIs selloff, is it a global phenomenon? Do you think that domestic flow will do a dollar to dollar matching?
The FII outflow is there for a couple of reasons. First of all, India has been performing excellently against all other emerging markets, especially against China, which is such a large market and people were overweight on India till last year. In last October-November, we did see relative valuations become so expensive that we saw five or six of the leading global investors banks, brokerage houses downgrade India from a very high overweight to neutral. So that is one of the reasons for relative valuations.

Second, overall we are not seeing that kind of flows in either country funds or all kinds of emerging market funds as we were seeing last year. That is obviously because of the fact that the Fed and now the ECB are signalling that the best of the easy money conditions globally are over. There has been a little bit of dollar appreciation, a little bit of taking risk off the table kind of a thing.

Second, with equities having done so well globally, a lot of the institutional portfolios globally have been kind of skewed in fear of equities and the appreciation actually made the skew even sharper. So even for normal portfolio rebalancing purposes, since bonds offer a bit more value with yields having gone up, we are seeing a little bit of global portfolio rebalancing amongst institutional investors also.

I do not think the India growth story is weaker than what it was before. We are just seeing some tactical asset allocation and some valuations reaction from the global investors. Local retail sentiment continues to be quite robust though volumes are coming off slowly. I do not think there is any let up in the SIP flows or ULIP flows as far as insurance companies are concerned. So the theory and the trend of financial savings coming into the system is pretty much intact.

What do you make of this phenomena that Nasdaq or these e-commerce companies or new-age companies which are making losses are actually going down everywhere and value is probably making a comeback? Was that expected? Can it continue for a while?
It could, especially since we are still seeing a lot of strength in commodities globally and that is also taking the commodity stocks up, along with the commodities boom. We have seen commodities underperforming the broader markets and especially the technology stocks for 10-15 years. So, there is a lot of relative valuation in terms of cheapness of commodity stocks globally – whether it is coal linked stocks or oil or steel or aluminium and the energy ecosystem so to say and for example the linkages. For example, when you talk about energy prices going up, it automatically means that aluminium prices will have to go up. This complex had been underperforming for valid reasons for a long time and because of underperformance, because of share prices being so cheap, companies were not investing.

So for 10 years, we have seen a lot of curtailment of investments in steel, aluminium and oil production. Now with the stimulus in the western system, suddenly there was a huge demand for all these items and we are seeing a lot of action in commodities. Some of the value plays are linked to commodities and that is pretty much a justified reaction, given that there has been such a long period of underinvestment.

In terms of the flows data that we have seen today, midcap inflow is up just around 5% and the small cap inflow is up around 46% month on month. Should we make anything of these kinds of details? Do you think largecaps will outperform midcaps and smallcaps this year?
If one looks at the relative performance over the last one year, mid and smallcaps outperformed by a wide margin and to that extent, our view is that the largecap universe is much more attractively priced versus the mid and smallcap universe. So if the market has to go up, it will be led by largecaps and within that, sectors like banking which had underperformed since Covid and which are catching up now. Relative valuation wise, largecap make more sense today.

Where do you stand in this entire debate of private banks versus PSU banks?
Broadly speaking, we are more confident about private sector banks because there also the valuations have come down, especially in some of the large banks. Only in PSU banks, we are seeing some bright spots, especially in the two or three of the larger ones. Scope is now emerging for stock picking even in the PSU space though we would really stick to the larger ones rather than the smaller ones. We are much more confident about the growth aspects of the retail part of the private sector banks, but some relative value is emerging in the PSU space.

Will there be any specific names that you will like in the PSU space? Would you look at the broad midcap names or would you stick to the leading bank SBI?
In PSUs, we typically tend to stick to the large two or three banks because beyond that, there are lots of uncertainty in terms of granularity of the portfolio, lumpiness, etc.

Infrastructure, capital good companies, power companies haven’t been doing well for the last one decade. In a higher interest rate environment, higher growth environment, these companies have learnt financial capital discipline over the last 10 years. Is it time for these companies to really rerate?
Yes, absolutely. So the broader hope and the investment thesis that we are working with is that the global economy, especially the US, had done extremely well in the post Covid scenario because of the massive fiscal stimulus and monetary stimulus that they gave. India’s fiscal stimulus was much muted and to that extent, our recovery has been delayed.

But now the best of the US and the global, especially the western world, stimulus is over and now it is India’s turn to lead the growth rate. If you look at FY23-24, India should be amongst the fastest growing economies of the world and that is not going to happen without a commensurate growth in the investment part also. So while consumption will provide the baseline growth, the kicker is if you have to grow beyond 5.5-6%, that has to come from the investment cycle.

We have underinvested for quite some time and the government has taken a lot of initiatives to create the feel good factor. There has been the ease of doing business in the last few years and now with the PLI schemes and government capex coming through, it is time for the investment portion; infrastructure, capital goods, construction segments to start performing.

Construction has been doing well because the government spending even in the last two to three years has been quite robust so the roads, the government linked buildings, the infrastructure, ports etc that construction was doing well now we are hoping that the real estate part should also kick in which is also a significant portion.

The problem with the previous decade was that a lot of these service providers like construction guys etc started becoming asset owners so those mistakes have been made and learned and now the bunch of successful ones that we are seeing are not really putting money into assets. They are actually growing their service business, the EPC business etc.

Capital goods companies typically are asset light in any case and with the order books filling up, they should be doing well. We are playing two or three things; one is PLI in a host of sectors. Now where will investments come through?

Second is the fact that we are also seeing a lot of revival of the real estate cycle and while we are talking about interest rates going up, they are still at very reasonable levels and income levels etc have gone up. Real estate should provide a good kicker and of course we are also seeing a lot of interest in India as a second manufacturing base to China even without PLI. All those things are going to help India and the consumption story along with the domestic infra and capital goods story and these should be the themes to play in the next two to three years.

In the meltdown and run up of 2009, most of the FMCG stocks margins were hit because of very high inflation as crude prices at that time but they became multi baggers over the next three to four years Are we in that phase of high inflation which is impacting a lot of these FMCG companies? Should one be overweight on these stocks for three to four years?
In FMCG stocks, I would look through the margin part. But when you are talking about building a portfolio of Rs 100, if you are going to go overweight on certain sectors like financials, the infrastructure, capital goods, then we will have to go underweight there. The relative growth rates of FMCG will still be inferior to financials, infrastructure, investments and consumer discretionary etc. So, we will continue to remain underweight in FMCG because valuations are not dirt cheap.

What is your view on IT going forward? Do you think it is time for valuations to catch up and it is going to be a bit of a consolidation game for the IT sector?
So it continues to be an exciting sector and we do see order books being robust for at least one to two years. On the flip side, we are seeing margin pressures and there is a scramble for talent because not only are global companies investing a lot in IT, but even the local startup ecosystem, the large startup, PE venture capital funded companies in India are investing a hell lot of money in technology. So there is a bit of margin pressure but the demand side is not an issue at all. It all then boils down to valuations and consolidation.

In the last month, month-and-a-half, we have seen a sharp correction in some of the stocks in IT and I do not think that is too much of a function of business prospects but it has more been a function of valuations. We have been very bullish on IT for almost two years now and we are very confident about the top line. It is just that valuations have probably caught up and the fact that we are now seeing more relative value in the domestic themes means that we are still positive but not as positive as we were till now on IT. We would rather shift our overweights to the more domestic facing segments like financials and other discretionary and investment linked sectors that we talked about.

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