Economic recovery will lead to broader market rally: Rahul Singh of Tata MF

In a Q&A, the CIO-Equities of the fund house says the movement of the dollar and global crude prices will be key factors to watch out for going ahead

While the large caps seem to be in the fair value range, an economic recovery led by liquidity and manufacturing revival, will lead to broadening of market rally, says Rahul Singh, CIO-Equities, Tata Mutual Fund. In an interview with Ashley Coutinho, he says the movement of the US dollar and global crude oil prices will be important factors to watch out for going ahead. Edited excerpts:

Indian equities are now trading at all-time highs. Has the market run ahead of fundamentals and are we seeing froth emerging in some parts of the market? 

The market rally has been contributed by a liquidity-driven bounce till July led by lower rates and bounce back in corporate earnings as cost cuts, tail winds in certain sectors such as IT and pharma, and lower-than-expected stress in financials. Corporate earnings have more to go in our view as economic revival gains ground. In fact, the Covid crisis has reinforced the view that the corporate earnings of top 200-300 companies did better than others as the brunt of the slowdown has been borne by smaller and unorganized players. What impact this has on consumption remains to be seen. Lastly, while the large caps, as indicated by Nifty forward price to earnings ratio of 21x, seems to be in the fair value range, an economic recovery led by liquidity and manufacturing revival will lead to broadening of the rally.

What will be the key triggers to watch out for in the near to medium term?

We expect the markets to be volatile, led by various factors. Any risk of renewed threat from the virus could lead to new restrictions and  could continue to exert pressure on markets. Market participants will keenly follow the announcements made during the Union Budget as well as the movement of the US dollar and global crude oil prices. The inflation trend will be another important factor to watch out for. However, it is difficult to give a directional view in the near term.

What are your views on mid- and small-cap stocks at this juncture? 

Mid- and small-caps are trading at relatively average levels with respect to large cap valuations making us neutral in terms of evaluating this category. Since it’s therefore likely to be a more stock specific market from here on, some of the new themes are represented more in the mid and small category. The economic recovery led by good domestic liquidity conditions, reform push and revival in investment cycle (household, government and private sector) has generally been positive for the mid and small cap category in the past.

Rahul Singh, CIO-Equities, Tata Mutual Fund

Which are the sectors or pockets of the market that you like in the aftermath of the pandemic? Which sectors have fallen out of favour?

While IT and pharma did well in the initial stages of the pandemic and had tailwinds, other sectors have recovered well now. Banking, which was one of the worst impacted sectors, has also seen lower Covid stress than was widely anticipated leading to multiple drivers of earning upgrades. Impact of cost cuts on the unorganised sector and consumption needs to be watched closely.

Do you expect any negative surprises in Q3?
 

There is unlikely to be too many surprises in Q3 because of good consumer demand. The next quarter, however, could be important to judge how the various pockets of consumption are holding up and whether there was pent up demand.

What are the learnings for fund managers from the pandemic? 

While we are cognizant of the lower bond yields and its positive impact on equity valuations, one needs to be careful in not getting carried away. In the end analysis, maximum returns are made when there is an earnings upgrade cycle in an industry or company. There could be some leeway for companies or industries in emerging sectors with 5-10-year runway for growth but ultimately earnings have to follow.

A few stocks had gained sizeable weight in the benchmark indices, exacerbating the problem of polarisation. Will this change going forward? 

In India, we have had multiple events which has led to polarisation, be it demonitisation, GST, NBFC crisis or Covid. Also, large companies tend to become stronger when economic growth slows down, which has been the case in the last 2-3 years. Remember that GDP growth had declined to 4 per cent even pre-Covid. With most of the events behind us, liquidity easing and the government push towards manufacturing, polarisation is likely to reduce going forward.