‘Market valuations at current level are not cheap’

The markets have gained ground last week despite the election-related uncertainty. KRISHNA KUMAR KARWA, managing director, Emkay Global Financial Services, tells Puneet

Wadhwa that a pick-up in the earnings momentum will ensure that anyone investing in the markets from a two-three year perspective will not be disappointed. Edited excerpts:

The Indian benchmarks have underperformed their global peers thus far in the calendar year 2019 (CY19). Can the tide turn in the remaining months?

Tide can definitely turn, if the country witnesses arrival of a stable government at the Centre, a continuity in the socio-economic policies, and resultantly, a continuation in the economic momentum. On the other hand, things may not improve if geopolitics around the country deteriorates dramatically, and the same results in a black-swan kind of situation.

How are the markets viewing political developments? Do you expect the current dispensation to return to power?

We are no political pundits, and I have no incremental insights into the same than anyone else on the Street. But yes, if the ruling dispensation comes back, the markets will take it positively, the same way as the markets rejoiced the return of the United Progressive Alliance (UPA) regime in

2009. For the markets, the continuity of policy framework is the most important vector. More than anything else, the markets shun discontinuity in policy direction.

Is the optimism in the mid- and small-caps here to stay?

Mid-caps on current valuations offer a healthy mix of valuation comfort and growth compounding for many years to come. This segment, many a time, offers non-linear growth trajectories, which are rare in the large-cap space. At some level, an investor in mid-caps is playing the game of entrepreneurship, which is high risk and high reward. In the long run, a basket of mid-cap stocks offers the best opportunity to generate significantly superior returns over the nominal growth of GDP (gross domestic product). Also, the mid-cap indices have already witnessed a 30 per cent correction from the peak, and at that valuation offer a 5-6 per cent incremental growth over the Nifty50.

Where do you see opportunities in the current market?

Our strategy for many years has been directed towards companies offering consistent growth and not witnessing huge technological disruptions. Also, this consistent growth should be brought to the shareholders’ fund, a high level of return on equity (ROE). In the current market, the opportunities are primarily around the consumption space; companies servicing this appetite will gain the most.

How comfortable are you with market valuation at this stage?

The current market valuation at 17 times is not in a very cheap zone, but the same was in the vicinity of 19 times, just a few months back. So, a reasonable correction has already happened. At the current valuations, we do not expect much re-rating. However, a pick-up in the earnings momentum will ensure that anyone investing in the markets from a two-three year perspective will not be disappointed. The markets can easily offer a better return than nominal growth of the GDP. That said, in the long-term, the markets which are a slice of corporate India, will offer a rate of growth in conjunction with the GDP growth rate.

How convinced are the retail investors about market stability?

The retail investors who remained invested have gained one of the best returns any asset class has generated. Also, the message has gone down to the retail investors that the best way to gain from equities is to take the route of systematic investment plans (SIPs). The retail flows can definitely get better once the uncertainty recedes, and the gains on the broader indices are optically visible.

What about foreign flows?

Predicting foreign flows in the country’s markets is not a very smart way to spend one’s mental bandwidth; the flow can swing both ways. At the same time, with the number of interest rate hikes in the US not going to the level of four, as predicted at the start of the year, we remain hopeful.

What are the plans for Emkay’s different business verticals, especially wealth management and broking segments?

India will soon cross $2,000 in per capita GDP, which is where the demand for wealth management products generally witnesses a proverbial point-of-inflexion. We are preparing for such slow-grinding, but tectonic shifts in individual wealth creation, and preservation behaviours. Our two decades of understanding of equities, and other asset classes, positions us uniquely to capitalise on this opportunity. Also, there is always an opportunity for cross-selling and trailing fee incomes. Prediction of growth rates is based on multivariate analysis, so offering a quantitative figure will not be a prudent thing.

MID-CAPS AT CURRENT PRICES OFFER A HEALTHY MIX OF VALUATION COMFORT AND GROWTH COMPOUNDING FOR MANY YEARS TO COME. THIS SEGMENT OFTEN OFFERS NON-LINEAR GROWTH TRAJECTORIES, WHICH ARE RARE IN THE LARGE-CAP SPACE