Market return will track earnings performance: Rahul Singh, Tata MF

Headline valuations are at 10-15 per cent premium to 10-year historical range, but are supported by the lower bond yields in comparison to what we have witnessed in the last decade, Singh said

Fear of a third wave of Covid infections coupled with inflation concerns have kept the equity market rally in check. RAHUL SINGH, chief investment officer for equities at Tata Mutual Fund, tells Puneet Wadhwa in an interview that as regards India, inflation risk and how that plays out into bond yields going ahead remains the biggest risk to equity valuation. Edited excerpts:

What is your outlook for the markets for the rest of 2021?

Headline valuations are at 10-15 per cent premium to 10-year historical range, but are supported by the lower bond yields in comparison to what we have witnessed in the last decade. In addition, India’s premium to other emerging markets (EMs) while approaching the higher-end now, is supported by the pro-growth and pro-reform stance of the government and fiscal/monetary policy. All things considered, market appears to be around its fair valuation; hence market return will track medium-term earnings performance i.e. beyond the current fiscal year. There is a cushion from the bottom-up corporate earnings, which have been supported by multiple sectors this time. 

How do you see the liquidity situation playing out globally and in India? 

Inflation risk and how that plays out into bond yields remains the biggest risk to equity valuation. Over the medium-term, any move to control bond yields despite inflation could be advantageous to EM currencies, including India, leading to liquidity flows to EMs. India’s standing within the EMs will depend on the earnings outlook and government policy.

What has been your investment strategy thus far in 2021?

Our investment portfolio is more diversified today than 12 months ago, as we see multiple drivers of earnings recovery. There are also signs of this recovery period translating to an expansionary phase, led by revival in the investment cycle – both in the private sector as well as households (real estate). The portfolios therefore are tilted towards a cyclical recovery.

Should investors buy into the economic recovery theme or stay on the sidelines in fear of a possible third wave of the Covid pandemic?

The impact of second wave was manageable on the economic activity although we still need to evaluate the long term impact of loss of incomes on consumption basket. One of the results of the second wave is that the medical infrastructure will be better equipped to cope with the third wave. If the third wave is delayed, the vaccination drive would also ensure that the impact is manageable. Moreover, some of the earnings recovery has been an outcome of Covid for example the demand revival in IT/pharma or the structural drivers to exports from the production-linked incentive (PLI) scheme. 

Is it a good time for investors to rejig portfolios?

Capex cycle recovery could be at an interesting stage as we see revival across sectors led by improvement in balance sheet and cash flows of the corporates, for example in Metals & Mining. In addition, success of PLI scheme and driver towards automation/robotics is also driving the capex. Industrials, capital goods and manufacturing could, therefore, emerge as an important sector in the next one – two years. On the other hand, the informal and unorganised sector has got impacted disproportionately as it has lost market share to organized sector during Covid disruptions and the impact of that on employment in informal sector. Hence, consumption needs to be watched, especially given the rich valuations in the consumer space. 

What's your view on public sector companies in the backdrop of the government's divestment agenda?

There is a new found seriousness among the government to monetise their assets, which includes privatisation as one of the options, while asset divestments are also on the cards. In addition, certain sectors like commodities are having a cyclical upturn. Sectors like utilities are trying to overcome the ESG overhand through push towards renewables. We believe that PSUs can therefore do well, although the effort should be to focus on companies or sectors within that segment which have either earning drivers or valuation catalysts. 

Do you see more headroom in large-cap defensive plays?

IT services is benefiting from a significant spending wave towards digitalization of businesses and all the Indian companies are well positioned to capitalise on the same, as they had been investing in building those capabilities pre-Covid. While there are supply side pressures emerging in terms of wage hikes, subcontracting and attrition, if the deal wins momentum continues, industry might be in a position to pass it through in pricing in the medium term.