“The market is expensive. Some of the pockets of the market are even more expensive. The market tends to overshoot the fundamentals from time to time but this is the time to pick stocks very carefully,” says Saibal Ghosh, Chief Investment Officer, Aegon Life Insurance Company.
How do you analyse the market in valuation terms? If you look at the valuations versus the earnings prospects of corporate India, does it appear reasonable?
Valuations are definitely very high on a PE multiple basis but at this point of time, the market is discounting the earning growth cycle for next three to five years and it is not very unlikely that at the beginning of the cycle the multiple remains at a high level. The steepness in the yield curve is also telling us that the market is expecting economic growth to sustain for the next three to five years. So yes, the market is expensive. Some of the pockets of the market are even more expensive. The market tends to overshoot the fundamentals from time to time but this is the time to pick stocks very carefully.
Are you participating in many of these consumer tech IPOs because this argument of valuation appears to be most hectic and loudest in those pockets? Are you looking forward to some of the future offerings?
Yes we do because the belief in technology is definitely there and from that point of view, we are at an inflection point where we are seeing disruptions in some of the sectors. Let us take for example two-wheelers. The disruptions are here and at the same time, some of the new tech, new age digital and e-commerce companies are getting listed and maybe the composition of the index will undergo a sea change in the next two to three years.
Given the valuation at the end of the day, the market loves to buy growth and many of these e-commerce players which are coming to the market, are aggregators and from that point of view, it is very difficult to value them by traditional valuation methods. Having said that, some of the valuations will also evolve. But at the end of the day, the market loves to buy growth and I firmly believe that this is the beginning of a change in the composition of index in days to come and we as fund managers have to be ahead of it and recognise some of it.
How are you approaching the broader markets, the midcaps in particular? What kind of largish or midsize midcaps are you picking?
Not a particular category, it is more a bottoms up approach because at the end of the day, we believe in the domestic growth story to pick up in days to come. We believe that this growth cycle will continue for the next three to five years.
If we really were to play the domestic growth story, midcaps typically represent the India growth story better than many of the largecaps. So, some of the midcap stocks can get into your portfolio from that perspective. These are little largish midcaps, good quality names with no governance issues and strong business models. So yes, we are banking on a few of them.
Secondly, from a broader market perspective, so far we were playing an inflationary trade where we were overweight on the source of inflation like commodities. All that has given us handsome returns, but going forward, we believe that the companies with a stronger pricing power even in the domestic market will perhaps fetch a good return and as a result, some of the midcaps are in our portfolio.
Where exactly are you seeing the best margin of safety and most attractive risk rewards including contra calls?
There are three sectors where we are looking broadly. On the industrial side, there are some stocks where we are finding great opportunities and some of the capex stocks which are on the digital front. Those are the areas we are finding extremely important because we are at an inflection point where digital is taking over. That expansion used to happen in the industrial capex sector as well. So we are banking on some of those stocks also.
We are also finding real estate very interesting given the valuation. The affordability index has gone up, the RERA is definitely a great change and we are also seeing some of the new generation housing finance companies coming up. We are quite positive on the real estate sector and we are finding value there. From a risk return perspective, that would be an interesting pocket.