Current domestic valuations look stretched and euphoria is starting to become visible in pockets. Is riding the valuation wave possible, on the back of owning new-age disruptive businesses geared for future growth? A holistic view encompassing macro as well as bottom-up analysis of growth drivers suggest vast wealth can be created by owning disruptive leaders and value creators.
The rise of data
The smartphone is the new internet. The Rs 500 smartphone will place massive load on networks. Data usage is likely to explode. By 2020, 80% of adults will have an internet-connected smartphone. Forward-thinking telecom disruptors look well positioned.
The disruptor, not the disruptee
Disruptors undermine the economics of traditional peers, usually leveraging technology to eliminate unnecessary admin and middle men to deliver better services, lower costs or both. Quality managements will seek to position themselves as disruptors, not the disrupted and will survive and thrive.
A new valuation paradigm?
It is always risky to think this time is different. An investor’s returns over the course of a lifetime will generally be determined by a few key decisions taken during a small minority of the time. There are two key periods in investing. First, when fear takes over and rational investment advice is abandoned. Second, when greed takes over and rationality is yet again abandoned.
Unfortunately, we may be in the latter period. Valuations are heady at 27.5 times Nifty, even after adjusting for low inflation and borrowing rates. One of two outcomes is likely, simplistically: either earnings come through and justify valuations, or stock prices will correct at some point.
The taxi fleet owners did not see Uber and Ola coming. Similarly, focusing only on bottom-up is like investing with blinders on. In a world driven by macro and global, theme based sectoral investing, a macro view alongside bottom up research will yield benefits.
Disruptive leadership & management adaptability
As investment managers, firms with disruptive leadership will thrive. We would list Reliance Industries, Bajaj Finance, Maruti, Tata Elxsi, Astral Poly, Minda Industries and Eicher as examples of companies with innovative leadership. While offense is preferable, it will be adaptive managements that thrive and we would list Motherson Sumi, Piramal Enterprises and Kotak Bank as companies that have demonstrated adaptability.
Complacency has set in to a certain extent, and risk appetite is rising. Market sentiment could be termed somewhat euphoric. The IPO segment is being driven by animal spirits. The fervour to own certain securities is evident, as is the fear of missing out. On the other hand, earnings—particularly for financials—are meeting expectations in large part. Crude oil and inflation remain benign, interest rates are low, and the economy looks reasonably healthy. Thorny NPAs are being addressed. Flows remain strong, but flows are a fickle partner that will desert you in your hour of need.
Market action reminds us of late 2010 and other times of excessive optimism. We worry that times of greed and exuberance are usually followed by corrections. The trend can, however, persist for some time.
We see limited evidence that the cycle is turning. So, our advice to clients: deploy capital cautiously, review asset allocations and protect when appropriate. For risk averse investors, discretion is the better part of valour. Following a strong move up by the markets, tactical asset allocation, re-balancing, portfolio hedging and structured product strategies are advisable. Strategies that protect downside, while maintaining exposure to the upside are an alternative option.
—Extracted from Sanctum Wealth Management’s Mid-Year Investment Outlook Report for 2017