‘Markets aren’t prepared for a phase of slowdown’

With the markets at record highs, Singapore-based VENUGOPAL GARRE, managing director, Bernstein, tells Puneet Wadhwa in an interview that he recommends investors focus on individual stock picks where there is room for secular growth characteristics or genuine levers for a strong cycle. The debates with foreign investors regarding India, he says, largely centre on the room for an overall strong macrocycle to emerge and the opportunities in the primary markets. Edited excerpts:

Will developed markets steal a march over emerging markets in 2021?

The performance of Indian equities has been very strong in a global context and it’s largely China that has pulled down the performance of Asian indices. With liquidity being the common driver for the equity markets globally, it is the relative merit of macro strength and potential Covid impact that will drive relative performance. We remained constructive on India through most of 2020 and a large part of this year but moved to a neutral view on the index two months back. We have, however, been arguing for a macro recovery off the lows, to provide sector-specific investment opportunities.

How are foreign investors viewing India as an investment destination within EMS?

Debates with foreign investors largely centre on the room for an overall strong macrocycle to emerge and the opportunities in the primary markets. On primary market opportunities, we see immense interest, especially in the new economy domains. There is still a divided

opinion, however, on the length and intensity of the macrocycle and the way stocks have rerated — it appears that a strong cycle is already built into expectations. Another leg-up would imply the expectation of sustenance of a cycle for a much longer period, which is a low probability event, presenting risks to the market. There is some downside risk to the market at this juncture and investors should start looking at selectively taking money off the table, especially from stocks where it is hard to justify the earnings-valuations context.

Is the primary market in India — given the slew of offerings and the recent subscription levels — a liquidity-linked threat to the secondary market?

There is always an element of excitement that emerges with a new listing, hence part of the liquidity gets redirected to those opportunities. This partly influences market liquidity but in a bullish market setting, the new listing presents new valuation benchmarks as well in some sectors, driving some valuation uplift/distortion in the existing stocks in that sector. A sustained market correction will not be merely led by a wave of fundraising but by a slower-thanexpected pace of macro recovery, mishaps after some large listings or a change in the liquidity environment led by any global factor.

Over the next few quarters, the base effect (economic growth, corporate earnings) will fade. Are the markets prepared to face a more realistic data set?

The markets are not prepared for a phase of slowdown, as the current expectation is of the continuation in earnings momentum led by a megacycle, which may last for several years. This thesis will get tested in a couple of quarters. Hence, there is still time for the markets to digest the potential reality of a situation where there is a weaker-thanexpected macrocycle.

Which sectors and stocks in the Indian context look pricey?

Almost every sector has seen a rerating over the past year. From a portfolio standpoint, we are underweight on consumption stocks. From a valuation perspective, consumer discretionary and building products are expensive relative to even their past history and hence appear pricey.

Investment-worthy sectors are now more from a relative standpoint — as absolute returns from here are purely a function of liquidity-led momentum. Financial and industrial sectors could still present better returns, given lower expectations and acceptable valuations.

THERE IS SOME DOWNSIDE RISK TO THE MARKET AT THIS JUNCTURE AND INVESTORS SHOULD START LOOKING AT SELECTIVELY TAKING MONEY OFF THE TABLE”

So, what is a sound investment strategy at these levels?

At this juncture, we would recommend focusing on individual stock picks where there is room for secular growth characteristics or genuine levers for a strong cycle. We consider tech and health care providing some such opportunities. This is in addition to the two macro-led sectors, we highlighted earlier as relative picks.

How should investors approach the telecom, metals and auto sectors?

We have been constructive on the telecom sector with two of the key stocks in our India paper portfolio. We moved metals to underweight, as we see supplyside actions to eventually impact the sector, although we have limited thoughts on near-term trades on that sector. We remain underweight on the auto sector. In the two-wheeler space, electric vehicles (EVS) will be a large disruption and believe that those who do not adopt EVS will face long-term market share issues. Any incumbent two-wheeler company — irrespective of their market positioning, not going ahead with EV launches — will face ESG led derating in a few years.