'Correlation of Indian markets with global peers will be high from here on'

Markets have taken all bad news regarding the rise in Covid-19 cases in India, economic stress, and sub-par corporate earnings in their stride. RAHUL SINGH, chief investment officer for equities at Tata Asset Management tells Puneet Wadhwa that he remains overweight on consumer, telecom, energy, and private banks. Edited excerpts:

How worried are you given the rapid rise in the equity markets since March 2020 lows in the absence of support from earnings growth?

India’s valuation premium to other emerging markets (EMs), which had declined to 20 per cent in March 2020, is now at an average level of 35 – 40 per cent. So, there is less room for outperformance. The correlation of Indian markets with global peers will be high from here on. Market trajectory will also depend on the pace of economic recovery. Some states are entering re-lockdown that can impact the overall growth numbers again and stall the economic recovery. A combination of these factors will drive the markets from here on apart from global liquidity events. However, from a long term perspective, there is an opportunity for India from the emerging supply chain and geopolitical dynamics. Good monsoon along with strong demand commentary from the agri-dependent sectors (agrochemicals, tractors) can drive economic growth from here on.

How should investors approach their equity allocation now?

Investors need to focus on the diversified large, mid, or multi-cap segments as the valuation discount of mid/small-cap is adequate at this stage. In addition, certain pockets of value have a potential for better valuation, especially if the government’s move towards privatisation picks up pace. Given that the broad market valuation seems to be having relatively less room for a significant appreciation and the short term news flow could remain volatile, balanced advantage funds are a good option and have weathered the storm very well in the last four-five months. As far as diversified equity funds are concerned, a staggered approach is advisable.

Your estimates for corporate earnings for the April – June 2020 quarter and financial year 2020-21 (FY21)?

The consensus Nifty EPS (earnings per share) estimate for FY22 has been 15 per cent so far, with the risk of 5 per cent cut given lack of fiscal stimulus and staggered lockdown removal. That said, the demand across industries is back at 70-90 per cent of pre-Covid-19 levels but the real picture will emerge in August – September once the pent-up demand and restocking.

Your overweight and underweight sectors? Any contrarian picks?

We are overweight on consumer, telecom, energy, and private banks. Remain underweight on autos. Though our funds were underweight on IT services, but that has changed slightly in recent months. That said, given the uncertainty around the impact that moratoriums will have on the asset quality of the banks down the road, financials have underperformed recently after being a bid driver of indices over the last two years. And the uncertainty there is likely to continue.

Is telecom a good bet despite the adjusted gross revenue (AGR) overhang?

The telecom sector is seeing a 10-year down cycle coming to an end as the industry structure has changed and continues to evolve for the better. This is bringing in the much-needed price discipline and hence a positive upgrade cycle in average revenue per user (ARPU) and earnings. In addition, in India there is an opportunity for the telecom operators to participate in the value creation that takes place in the surrounding ecosystem of e-commerce. This is a new trend unlike the rest of the world. Telecom stocks offer an opportunity to participate in the growth of the digital economy.