ETMarkets Smart Talk: Risk-rewards more favorably asymmetric elsewhere than in India: Piyush Sharma

Sensex, Nifty50 slipped below crucial support levels. What are the top 5 factors which are weighing on D-Street?
India’s headline names were and still are among the most richly priced globally. Such premiums are typically a function of superior underlying profitability and sustainable growth.

When you struggle to establish the latter vs your peer set, it’s inevitable that these premiums are questioned.

If it hadn’t been for the COVID surge in China, we would be surprised if India would have still outpaced Emerging Asia on a year-to-date (YTD) basis.

Markets will always find a ground to address these disconnects. We are witnessing a near annihilation of pricing power globally, and inflationary headwinds are quite apparent.

Tightening is now ensuring that assets that were beneficiaries of expanded liquidity are now seeing broad-based cuts as that liquidity gushes out of the door.

Small & midcaps have already entered bear territory (down over 20% from highs). How should investors play this theme? Time to turn cautious or if someone plans to invest now what is the kind of time horizon which one should look at?
We invest in a space that typically straddles between cheap and fairly valued and is rarely ‘rich’. To be clear, not everything small was rich at the beginning of the year.

To put that in perspective, Nifty50 (ex-financials) was trading at north of 60% premium vs. our book at the end of December, even as it traded at nearly 25% discount vs. headline small-caps.

Liquidity-induced multiple expansion in India over the prior 2 years wasn’t as broad-based as widely perceived. So, it’s not a bit surprising that we haven’t seen wheels come off of everything.

Accordingly, if an investor has seen panic spilling over into situations where multiples hadn’t expanded irrationally and earnings have been reasonably robust, he/she should continue to engage.

Coming into 2022, we witnessed some of the sharpest valuation dichotomies in distant memory. On saying the insanity end of the value spectrum were private assets, nearly anything listed in the US, Indian headline names, etc., while at the other end was the emerging Asia listed pack, or even select smaller names in India.

Essentially, you can always identify value and I would discourage investors from trying to identify that by bucketing investments into geographies and sizes.

As far as time horizon is concerned, it depends on what one is looking at. The less institutionalized the situation, the longer should be your time horizon.

Also, unless your hypothesis has structurally changed or valuation seems full (and that obviously changes based on views), there is no reason to alter the course.

Price isn’t the arbiter of value, particularly in poor price discovery pockets. We are supposed to capitalize on sentiment, and not instead partake in cycles of frenzy or panic around us.

From our vantage point, there is really no reason to be significantly more or less cautious than what one was say two quarters ago. You can never really afford to not be cautious.

Sentiments always move between entitlement and utter dismay. Embrace it and be selective, as always.

When will the market bounce back? Some experts say that a recovery in commodity prices could help markets recover. What are your views?
I don’t have the slightest idea when Indian equities will begin their bounce, let alone one that is broad-based. That said, I can try and postulate how it’ll likely pan out.

Just as the rise wasn’t broad-based, don’t expect the bounce back to be widespread either. In my view, a significant part of run-up over the past couple of quarters seemed indiscriminate.

Unsurprisingly, this is where a lot of recent pain was concentrated, but I don’t yet see all of the disconnects unwounded yet in several of these situations.

As far as material costs are concerned, we do not expect a sharp pullback in inflationary pressures in the near term and accordingly, we aren’t in the camp that is working with the thesis of a significant drop in metal prices.

That said, it’s undeniable that material costs have been a significant headwind globally, including for some of the stickiest consumption categories.

However, you can’t lose sight of the fact that at a headline index level in India, the potential benefit of materials softening will be significantly offset by drag-backs at Materials components.

While Materials make just over a tenth of Nifty 50 (ex-financials) weight, its notable that these components account for more than a fifth of Nifty50’s net debt (ex-financials).

At a headline index level, therefore, expect significant leveraged earnings offset if/when materials soften, particularly in undersupplied metals situations.

Is the market expensive at current levels? Is Nifty50 expensive at 16K or was it more expensive at 18K? PE has come down towards 20x – a level seen around March 2020.
We certainly aren’t in the camp that comes remotely close to concluding that Indian headline names are cheap on an absolute basis.

The more acute issue however revolves around debating how relatively unattractive they are at this point. If one were to even draw out optimistic re-opening scenarios, one would find as much or more room for operating leverage in most of emerging Asia, and certainly, find more financial leverage in most of these markets.

Be it on value or realistic growth expectations, we don’t see India stack up as competitively as most domestic investors do.

In our opinion, therefore, the risk rewards are much more favorably asymmetric elsewhere than what we see in India.

Any rules which one should follow when selling a stock amid a double-digit fall seen in the Nifty50? (down 15% from highs).
For us, exits are dictated by eventual convergence between our estimates of value and market sentiments. Exits can certainly also be a function of a structural change in our thesis, which happens occasionally.

A broad-based decline or appreciation in prices however shouldn’t influence exit decisions.

What is your call on the rupee? Will the currency continue its down move against the USD? Is FII selling related to currency depreciation?
Significant foreign institutional selling inevitably puts pressure on underlying currencies of deficit economies where such flows make a meaningful impact on reserves.

Be it the South African rand, Brazilian real, or the Indian rupee, this almost always holds true. The near-certain tightening in the US today further exacerbates this pressure.

So, it’s hard not to side with the thesis of continued pressure on the rupee. While we wouldn’t want to second guess the decision-making of allocators elsewhere, we do not find it a bit surprising that India is being underweighted in the current environment.

We can nonetheless certainly debate whether short-term underlying currency moves should drive decision-making or not. We certainly don’t see ourselves getting overly influenced by such moves.

Consider the Nasdaq Composite, for instance – It was inarguably the frothiest listed pocket globally and has unsurprisingly sold off since November last year.

Nonetheless, we still don’t view it anywhere among the most attractive listed opportunities today and that view is decoupled from our view of the USD.

Where are fund managers placing their bet as most stocks are available at a steep discount compared to what to a month back?.
We aren’t in the business of evaluating other strategies, and accordingly aren’t well-positioned to comment on actions elsewhere. I would however take this opportunity to cite a considerably elevated risk that hasn’t been as apparent to me previously.

We all understand that there is no room for jingoism in investing. However, in this alphabet soup of a social media world that we live in today, we see several market participants often egging on individual investors.

My recommendation to these investors would be to take a dispassionate view and decide on realistic expectations vs absorbing narratives that are deep-rooted in jingoism.

Are you suggesting your clients hold on to cash or deploy at current levels?.
Our holdings weren’t beneficiaries of the pandemic-induced liquidity largesse, and therefore there is no good reason why receding liquidity should be a headwind for us.

In sharp contrast, our book today actually trades at more than 15% discount vs. its pre-pandemic history. While we haven’t participated in the YTD drawdown just yet, we would certainly advise our investors to engage aggressively if there were a collateral sentiment spillover into our holdings.

Regardless of market conditions though, the allocation has to be a consistent process. It makes little sense to try and time allocations, especially in situations where valuations are on your side and the earnings thesis remains solid and sustainable.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)