Markets not fully discounting headwinds at the current levels: Emkay Global

New-age businesses are not going away; ignoring them completely can be injurious to one's portfolio's health, Karwa said in this exclusive interview

It has been a stupendous liquidity-driven run for the equity markets in Samvat 2077. As they prepare to usher in the new year, KRISHNA KUMAR KARWA, managing director, Emkay Global Financial Services, tells Puneet Wadhwa in an interview that stocks will track earnings and valuations, and to that extent companies whose stock prices are reflecting the optimistic outlook three – four years down the line are most vulnerable to price and time corrections. Edited excerpts:

How do you see the markets play out in the next Samvat? What are your return expectations from the frontline indices and the mid, small-cap segments?

Over the past one year, the Nifty has delivered a 50 per cent return, and the small /mid cap indices broadly delivered around 80 per cent returns. Over a three-year period, Nifty / mid-and small-cap indices have delivered 90 per cent returns. It will be unfair to assume that the benchmark indices will deliver similar returns in the short-term. Benchmark index returns in the short-term may not be the right way to assess the investment opportunity. A carefully constructed portfolio should deliver 12-15 per cent compounded return over the medium-term. 

What is the portfolio construct you suggest to harness these returns?

Right from information technology (IT), domestic manufacturing, real estate and real estate full chain, to financial services, capital market intermediaries, and capital goods – all these sectors are expected to do well over the medium-term. Investors can make significant wealth by investing in domestic equities in the medium-term.

What are the key risks to the markets in the next Samvat and to what extent are they pricing them in at the current levels?

Macro headwinds like high oil prices , supply chain disruptions, the debate on transient versus sticky inflation, the possibility of hardening interest rates across the globe, internal economic challenges in China and its global ramifications, and the ongoing US-China spats will keep global and local markets volatile for sure. The markets are currently not fully discounting these headwinds. That said, stocks will track earnings and valuations, and to that extent companies whose stock prices are reflecting the optimistic outlook three – four years down the line are most vulnerable to price and time corrections.

Do you see liquidity being pulled out of the markets going ahead as investors turn their attention to the primary markets given the slew of initial public offers lined up?

There is abundant liquidity in the system. Global liquidity, in the medium-term, could be at risk in the light of expected tapering of bond buying by the US Fed, and subsequent rise in interest rates. Domestic investors do not have too many choices to deploy their financial savings in the light of the prevailing low interest rates. Liquidity will flow to primary or secondary markets depending upon the opportunities available. Unique technology-led IPOs where there are no listed comparable alternatives will attract investor interest.

Investors now seem to be ignoring the current earnings of new-age firms and are betting on future projections. Is the trend worrying?

I do not think there is a clear answer to this. Many of these new-age firms address large business opportunities which can disrupt existing business models. Currently, massive global capital is available to such firms to fund losses as they build such businesses. Traditional cash flow focussed investors will not be able to justify the valuations of such businesses. That said, investors should keep such companies on their radar and invest in them over a longer time frame, keeping space to average, and expect some of these companies to bite the dust over a longer time frame. Basically, have a portfolio approach to this part of the investments. These new-age businesses are not going away; ignoring them completely can be injurious to one’s portfolio’s health.  

How do you see corporate earnings shape up over the next few quarters?

Rising commodity prices is a matter of short-term concern as corporates try to balance between maintaining margins and sustaining demand at higher price points. The ability of corporates to pass on such input price hikes will vary from sector to sector, but ultimately alternates / down trading etc. will kick in if the end consumer is unable to bear such high prices. Currently, we do not believe that there is any risk to consensus earnings estimates, unless supply side disruptions do not ease off in the next few quarters and pent up demand for manufactured goods eases.