What worked in last 5-10 years, may not work in next 3-5 years: Mahesh Nandurkar
Synopsis
“I do worry that some of the global risks that we just discussed and the risk of rising yields in India will probably cap the broader market returns over the next 12 months,” says the value strategist.
By ET Now
Last Updated:
The economic growth momentum is definitely looking bright over the next 12 to 24 months at least and beyond that as well. That calls for some change in sector and stock allocations. What has worked in the last five or 10 years may not work in the next three years to five years because the growth outlook today is much better, says Mahesh Nandurkar, MD, Jefferies.
Just looking at India’s outperformance year to date or for that matter the last three months, the PE multiples are skirting close to highs. Is that any reason to worry or do you ride the wave now that the momentum is backing us?
It has been a positive surprise for us as well that India has ended up outperforming despite the Second Wave and the economic impact. But the economic recovery post unlocking is clearly surprising on the positive side. We track a whole host of indicators and many of these are daily and weekly data points which are pretty high frequency in nature and are actually showing that the pace of recovery post the second wave is a tad faster than what we saw after the first wave
This is a big surprise because the first wave economic impact was deeper. It was a national lockdown. This time, the economic impact was shallower with local lockdowns by different states. The momentum is back and we expect to see reasonable momentum in the near term. But if we take a 6-12 months’ view, a lot depends on the global factors and that makes me a bit cautious from a 12-month perspective.
Just looking at India’s outperformance year to date or for that matter the last three months, the PE multiples are skirting close to highs. Is that any reason to worry or do you ride the wave now that the momentum is backing us?
It has been a positive surprise for us as well that India has ended up outperforming despite the Second Wave and the economic impact. But the economic recovery post unlocking is clearly surprising on the positive side. We track a whole host of indicators and many of these are daily and weekly data points which are pretty high frequency in nature and are actually showing that the pace of recovery post the second wave is a tad faster than what we saw after the first wave
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This is a big surprise because the first wave economic impact was deeper. It was a national lockdown. This time, the economic impact was shallower with local lockdowns by different states. The momentum is back and we expect to see reasonable momentum in the near term. But if we take a 6-12 months’ view, a lot depends on the global factors and that makes me a bit cautious from a 12-month perspective.
There has been a lot of churn as the market continues to try and find opportunity within every pocket. Going forward, what is going to be the area to bet on? What outside of IT is going to be an interesting outperformer going forward?
I believe that the economic trajectory has bottomed out globally as well as in India and the economic growth momentum is definitely looking quite bright over the next 12 to 24 months at least and hopefully beyond that as well. That calls for some change in sector and stock allocations. What has worked in the last five or 10 years may not work in the next three years to five years because the growth outlook today is much better.
I believe that the economic trajectory has bottomed out globally as well as in India and the economic growth momentum is definitely looking quite bright over the next 12 to 24 months at least and hopefully beyond that as well. That calls for some change in sector and stock allocations. What has worked in the last five or 10 years may not work in the next three years to five years because the growth outlook today is much better.
In the Indian context, we are sitting at the bottom of the cyclical economic trends and I believe that some of the expensive defensive names that have done pretty well in the last five years, run the risk of underperformance going forward. Some of the cyclical names -- on the property side and some of the industrial names -- would be outperforming going forward.
Since you are tracking global indicators, are you seeing any danger of a topping out? Some of the technical indicators are pointing towards that even though the sentiment is far from selling. What should this mean in terms of impact in India which has been driven by a lot of domestic investors in the last couple of months?
Globally, the one variable to watch out for is what is happening to the rate outlook and many other things. But if you ask me what is the one indicator that we should be looking out for, we should be focussing on the US five-year inflation expectations. Those have been going up over the last three to six months. My sense is irrespective of whether the US inflation returns or not, we as equity investors need to be worried about whether there will be an inflation scare. The five-year inflation expectation would be a good indicator of how close or how far we are from that inflation scare.
So, the global risk that we are running is there could be an inflation scare which will cause the global markets to sell off and the emerging markets and India will not be spared. That is the one risk that we need to keep in mind from a global perspective. From the Indian perspective, the 10-year bond yields, the risk rerates have been held down and managed quite well by the RBI but if you look at some of the other non-benchmark yields like the 15-year bond, it is now more liquid than the 10-year yield. The true indicator of what the yields are is the 15-year in my view and not the 10-year.
It is quite obvious that as the economic growth recovers in India, RBI will be going a bit slow on liquidity infusion. Currently there is a lot of excess liquidity which will probably begin to come down, the yields will begin to go up and the risk free rate will start going up. Theoretically there should be some market derating. That is what I meant when I said look at the market from a 6-12 months’ point of view. I see the risk free rates in India going up by 50 to 75 bps and that will cause the market to de-rate in terms of PE multiples. Thankfully we are in the middle of pretty strong earnings growth and so the market PE multiples going down can be offset to a large extent by the earnings growth that we are witnessing. But from a 12-month perspective, one should not be budgeting for more than single digit returns.
What is the dictating factor -- is it growth visibility or is it valuation?
I would say both but clearly the global as well as the Indian strategy that we clearly like is that of value. We have a value bias in the selection of stocks and sectors and we are looking at segments where we have seen big underperformance because of the earnings growth related or other economic reasons.
From the near-term perspective, the housing market recovery is something that we continue to be very bullish on. We have been talking about it for the last three-four quarters now. The housing market recovery was shaping up quite nicely before the Second Wave hit us and now once again the trends are picking up. The June property registration data for Mumbai, for Delhi and for Maharashtra show that the housing market recovery which was visible before the second wave is now beginning to be visible once again.
That is one segment of the economy which we are very bullish about and obviously there are multiple ways to play that through the stock market. One way is through the property developers but then there are the other related themes like cement, building material, housing finance companies etc.
Do you think a large part of the prognosis of the housing market recovery is based on the assumption that interest rates will continue to remain low?
Not exactly. Interest rates have come down and in the last five-six years, the mortgage rates have come down from 11% to close to 7%. A 25-50 or even 100 bps jump in the interest rates or mortgage rates is not really going to have much of an impact on the housing market recovery. So, that is a key factor.
The key factor according to me is going to be how the demand supply and the pricing situations unfold because ultimately it is one of the single biggest investments that anybody makes in his or her lifetime and everybody wants to time the market. The biggest driver for property demand in my view is the price momentum. There is a lot of pent-up demand and a lot of people who have been postponing the purchases for a long period of time would jump in. Interest rates going up by 50-100 bps would not really have much of a negative impact. The pricing momentum will be key.
Since you are tracking global indicators, are you seeing any danger of a topping out? Some of the technical indicators are pointing towards that even though the sentiment is far from selling. What should this mean in terms of impact in India which has been driven by a lot of domestic investors in the last couple of months?
Globally, the one variable to watch out for is what is happening to the rate outlook and many other things. But if you ask me what is the one indicator that we should be looking out for, we should be focussing on the US five-year inflation expectations. Those have been going up over the last three to six months. My sense is irrespective of whether the US inflation returns or not, we as equity investors need to be worried about whether there will be an inflation scare. The five-year inflation expectation would be a good indicator of how close or how far we are from that inflation scare.
So, the global risk that we are running is there could be an inflation scare which will cause the global markets to sell off and the emerging markets and India will not be spared. That is the one risk that we need to keep in mind from a global perspective. From the Indian perspective, the 10-year bond yields, the risk rerates have been held down and managed quite well by the RBI but if you look at some of the other non-benchmark yields like the 15-year bond, it is now more liquid than the 10-year yield. The true indicator of what the yields are is the 15-year in my view and not the 10-year.
It is quite obvious that as the economic growth recovers in India, RBI will be going a bit slow on liquidity infusion. Currently there is a lot of excess liquidity which will probably begin to come down, the yields will begin to go up and the risk free rate will start going up. Theoretically there should be some market derating. That is what I meant when I said look at the market from a 6-12 months’ point of view. I see the risk free rates in India going up by 50 to 75 bps and that will cause the market to de-rate in terms of PE multiples. Thankfully we are in the middle of pretty strong earnings growth and so the market PE multiples going down can be offset to a large extent by the earnings growth that we are witnessing. But from a 12-month perspective, one should not be budgeting for more than single digit returns.
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What is the dictating factor -- is it growth visibility or is it valuation?
I would say both but clearly the global as well as the Indian strategy that we clearly like is that of value. We have a value bias in the selection of stocks and sectors and we are looking at segments where we have seen big underperformance because of the earnings growth related or other economic reasons.
From the near-term perspective, the housing market recovery is something that we continue to be very bullish on. We have been talking about it for the last three-four quarters now. The housing market recovery was shaping up quite nicely before the Second Wave hit us and now once again the trends are picking up. The June property registration data for Mumbai, for Delhi and for Maharashtra show that the housing market recovery which was visible before the second wave is now beginning to be visible once again.
That is one segment of the economy which we are very bullish about and obviously there are multiple ways to play that through the stock market. One way is through the property developers but then there are the other related themes like cement, building material, housing finance companies etc.
Do you think a large part of the prognosis of the housing market recovery is based on the assumption that interest rates will continue to remain low?
Not exactly. Interest rates have come down and in the last five-six years, the mortgage rates have come down from 11% to close to 7%. A 25-50 or even 100 bps jump in the interest rates or mortgage rates is not really going to have much of an impact on the housing market recovery. So, that is a key factor.
The key factor according to me is going to be how the demand supply and the pricing situations unfold because ultimately it is one of the single biggest investments that anybody makes in his or her lifetime and everybody wants to time the market. The biggest driver for property demand in my view is the price momentum. There is a lot of pent-up demand and a lot of people who have been postponing the purchases for a long period of time would jump in. Interest rates going up by 50-100 bps would not really have much of a negative impact. The pricing momentum will be key.
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