We are seeing financial markets and most asset classes around the world trending upward despite the impact of Covid. This is driven by significantly higher liquidity in the markets.
While India battles the second wave of covid-19, share market has shown resilience, refusing to fall more than 5% from all-time highs. Domestic stock markets have been helped by the high liquidity, better profitability owing to cost-cutting, and some positives on the vaccine front, said Kalpen Parekh, President, DSP Investment Managers, in an interview with Kshitij Bhargava of Financial Express Online. Kalpen Parekh shares his views on what investors should make of Nifty’s P/E ratio and discusses sectors where he sees opportunity at this juncture. Here are the edited excerpts.
Q – Market fell only 5% from all-time highs before moving up again, despite the severe second covid-19 wave; why so?
We are seeing financial markets and most asset classes around the world trending upward despite the impact of Covid. This is driven by significantly higher liquidity in the markets and the cost of that liquidity being very low. Additionally, in the last few months, companies have significantly cut down on costs. Some of these cost savings are permanent and thus companies will show very good profitability in the results season.
At the same time, vaccinations do give hope that we would be able to navigate through wave 2 sooner than later. Though as we speak, we are seeing lockdowns due to the intensity of wave 2 and we will need to be watchful of trends in the coming quarters.
Q – With revised lockdowns in place now, how far have we pushed the economic recovery?
It is a bit premature right now to determine the pace of economic recovery. Lockdowns are likely to last a few months till the number of cases come down drastically and the pace of vaccinations picks up. We may see lower than expected profitability and business growth at least for the next one or two quarters with the new wave and closure in most states now.
Yet stock prices are rising. Generally in periods of excess liquidity, markets look through negative events as temporary events and assume eventually, things will normalize. Yet it’s time to be cautious.
Q – Nifty’s P/E ratio is down from highs but still not cheap, what do you make of it right now?
The reason remains the same. When there is so much liquidity, investors will continue to invest plus the hope of improved profits keeps us positive. Over the last 20 years, in good times, our earnings have been priced at 25 to 30 times and in bear markets at 10-12 times. In phase 1 of lockdown, we have seen markets hitting recent lows at 17 times PE. So at a market level, valuations are high in aggregate.
At the same time, there are companies and sectors that are either cheap or fairly priced. Sector popularity has changed over the last five years. Banks / NBFCs / Autos have given way to Cement, Healthcare and IT stocks that have done better in the last 12 months, thus creating valuation gaps and opportunities.
Q – In the battle between growth and value stocks, how do you construct your portfolio?
Our preference today is companies that have survived and are becoming better in this phase of consolidation. Companies that are increasing market share, adding capacity without too much debt as well as companies that are under-owned but going through significant improvement in their balance sheets form a part of our portfolio construction.
We have a mix of market leaders across sectors as well as survivors in difficult sectors across our funds depending on the mandate of each fund. Our starting point is good companies first – and then within that look for valuation comfort. It is also true that the best companies are never cheap and vice versa. It is a very unique phase in the market cycle, where growth rates are moderate, but valuations are not.
Q- What sectors are you overweight in?
In some of our large funds, our portfolios are constructed keeping individual companies in mind. Although banks and NBFCs are the largest sectoral constituent in our indices right now, our portfolios only have the top three or four banks and very few NBFCs.
We have been overweight in the technology space for the last one year. We are overweight here considering that there is a very large shift towards digitization globally because of the way COVID has played out and the very large move for work from home, and the long term trend of most businesses digitising. Our other preferences are companies in healthcare/cement/industrials too.
Q – SEBI’s new circular talks about fund houses having skin in the game, what are your views?
As a mutual fund house, DSP announced the alignment of interest rule for all our employees (not just key) around two and a half years back, so that every employee of our company invests only in mutual funds and that too, just DSP schemes. We have adapted to these principles for the last two years.