Dr Joseph Thomas, Head of Research, Emkay Wealth Management, says “overall, we will see fairly good performance from all the major sectors, including especially pharma, the banking and financial services segments, and also from a number of segments which have been doing fairly well in terms of the overall management of their financial position, in terms of reducing their borrowing book, as also in enhancing the business position in the newer markets and also in enhancing the business position in the newer markets and also in building capacity.”
We are at the cusp of the third quarter earnings starting off; we have seen early signs of Q3 updates coming in. What are your thoughts on how the earnings season will be, in terms of which sectors do you see strong performance and which ones could be on the weaker side?
Coming to the earnings, we have seen fairly strong earnings, underlying strength in the earnings for the last quarter. We expect the same underlying tone to continue in the coming quarter too, but it may not be as strong as what we had seen in the last quarter. Overall, we will see fairly good performance from all the major sectors, including especially pharma, the banking and financial services segments, and also from a number of segments which have been doing fairly well in terms of the
overall management of their financial position, in terms of reducing their borrowing book, as also in enhancing the business position in the newer markets and also in building capacity.
Talking of earnings, how are the valuations looking both on the benchmark indices front and also on the broader market front because there are two sections, one says valuations are starting to get frothy; the other says no, earnings support is there, so valuations are still fair.
Yes, valuations do not look cheap, which does not mean that they are too expensive also, but we could term the valuations may be reasonable in a sense, which means that the current valuations and the pricing is or the valuations is based on certain strong fundamentals like robust economic growth that has been happening in the economy, the rate of economic growth is very good compared to even other economies and it is expected to keep up that momentum.
The second thing is that the capex, especially the government capex and the compounded annual growth of government capex in the last seven-eight years has been around 12%.
The third factor which gives a lot of support to the markets is the probability of a soft money policy coming from the Reserve Bank of India in the coming days, which means that the interest rate cycle of rate hikes is past us and we might see soft money policy coming in, maybe it might take maybe one quarter, maybe two quarters, but it is going to come in.
We are seeing a very strong investment cycle at this point of time. The PLI scheme, which the government has introduced, has also helped enhance capacity or introduce new capacity and this enhancement and introduction of new capacity, all these things have gone into determining the demand for stocks in the markets and also FII flows have been coming in. So, overall, there is a robustness about the investment cycle, the overall economy, the liquidity conditions and the interest rate scenario.
All these things have helped the markets to move up at this point of time to the levels that we are seeing at this time. And coming to the relative valuations, largecaps look much better at this point of time. Largecaps, mainly because, for example, in the last one year, if we take the 12 months trailing, the largecaps’ long-term average is at 24 and the valuations are somewhere close to that, which means that the largecap segment is fairly priced and they make immense investment sense.
When we go to midcaps and the smallcaps, if you look at the 12 months trailing PE, the smallcaps are at around 27.5 and the midcaps are at around 26 which means that they have a bit of a stretched valuation. This is also mainly because of one factor that we have seen in the markets that there is a lot of moneys flowing into midcap stocks and smallcap stocks mainly through the mutual fund and these mutual fund moneys which have been coming into the markets have led to demand for these stocks and
they have moved up which means that even in portfolios which have invested into largecaps, midcaps and smallcaps, there is a distortion that is happening at this point of time because of the rising value of smallcaps and midcaps.
The largecap composition probably may be relatively smaller. Therefore, at this point of time, one could be looking at the largecap segment more rather than the midcaps and the smallcaps and midcap and smallcap investments could continue but it is the largecap segment which should be looked at more closely at this point of time.
The other space I want to talk to you about is the metals pack. One section of the market believes that the dollar index coming down is actually hugely beneficial for metal packs. The other side believes that a weak US and China will continue to be an issue for the metal sector. Which camp are you in?
As far as metals are concerned, most of the metal prices are quartered in terms of US dollars. So, the fundamental thing there is that if the US dollar starts depreciating and if the US dollar weakens, all those commodities which are in US dollars, which almost all commodities are including the precious metals, gold, silver or even oil, are likely to edge higher. But we need to get a clear signal on that, that the US dollar is likely to start declining.
At this point of time, we see the dollar index has been at around 101.50 to 102.50 levels. It touched 104 briefly. But in the immediate term, it is expected to move towards 99.91, 100.20 levels. But we will see a decline in the dollar index as the clear indications on the US interest rate trajectory comes to the surface, that at this point of time it is almost clear that US official policy on interest rates would be one of hold at this point of time and Fed could go in for a cut in interest rate also.
The dollar has been able to hold well, mainly because of the rising interest rates in the US and therefore the dollar index also rallied. Once the dollar starts declining, the metal prices could gradually move up, that is a strong reason for metal prices to move up. But there are other countervailing factors also.
For example, China has been a major buyer of commodities, especially metals and as of now even based on Xi’s address to the nation the other day, China probably is shifting a little bit because economically they have been quite depressed at this point of time with growth at sub-5% levels. It is highly likely that China could shift its focus to artificial intelligence and more tech driven and more internal driven growth.
Therefore, the Chinese demand coming into the markets or not, the US dollar declining or US dollar rising or not, these are two factors which would be critical and I think it will be a prudent assumption to make that with decline in the US dollars, which could happen over the next one or two quarters systematically, the commodity prices could also move up.