Markets Buoyed By Retail Flows But Cautious On Earnings Growth: Bandhan AMC's Mrinal Singh

Mrinal Singh: The short answer is, clearly yes. You know, anybody with a fundamental background or approach to investing would find the aggregate valuations uncomfortable. But obviously, the more important thing is that the economic trajectory of the economy is very, very robust. So we're talking about the Indian economy being the best story for the next decade.

Having said that, the current valuations are encompassing a fair degree of near-term gains. Now it remains to be seen, how and where can we see superior acceleration to be able to create superior returns going ahead for the investors.

Mrinal Singh: At least from a market participant view, the expectation in the near term is, no rate cuts. So, partially it is built into expectation. I think the current high-frequency data pushes the rate cut expectations a bit further.

So, for the time being both the participants and the markets in the Indian context are not expecting any down ticks in rates from the policy makers.

Mrinal Singh: When considering the near-term earnings growth, the valuations are clearly much ahead of that. So it does pose a challenge. The market is showing a lot of momentum, buoyed by the retail flows.

But then there are triggers on the way I would say. The justification for higher valuations can be acceleration of growth and earnings and there are enough things that can do that.

We have been as an economy underperforming the potential. I think a lot of supply-side initiatives have been done. In the last four or five years, we've seen a reduction in corporate tax rates. We've seen PLI in a significant way, incentivising capacity creation, although we haven't seen very large investments getting channelised in that direction.

But I think at least from our policymakers’ perspective, we've seen supply-side initiatives. I think what remains to be seen is, you know, if we can see some kind of demand-side push. The upcoming Budget could be an interesting thing to watch for that.

If we do see demand-side push, there could be significant acceleration in the economy and it will reflect upon the growth rates for earnings and things could look different potentially. But for the near-term data, as we see, a lot is already baked into valuations. That is the fact.

Mrinal Singh: In my view, the most robust or solid theme for the Indian economy is what I would call gross fixed asset formation. Be it housing, be it private capex revival, be government capex and consumption. So, I think, these are the four legs that will continue to drive at different paces at different times in the economy.

Now, lending is a second-order play in this. I mean, you could potentially do government capex, private capex or housing through cement, through lenders or anything.

So, banking is going to be a beneficiary as and when the domestic economy volumes pick up. It already is, in a way, showing positive traction. So that would be a logical thing to, you know, invest money into.

But then, having said that, I still feel that there are direct plays as well which will definitely benefit where the runway is quite long. As I mentioned very clearly, that would merit investment from a fund manager's perspective.

Mrinal Singh: So very clearly, where we are in the market, the regulator will get more active. We are already seeing signs.

I think that regulatory action will only increase going ahead. It is merited also, particularly in the market, as we see a lot of speculative activity. We also see some kind of periodic spurious, you know, malpractices that come out. So regulators' mandate is to obviously control or eradicate that.

So we'll see more action, we will see that in lending business as well.

So, if regulatory action is on the uptick, we would rather be with established names whose governance is pristine. They clearly have seen cycles and are very well-versed with the regulation and the interpretation that it brings.

Mrinal Singh: The IT companies, on a broader level, have done better than the street expectation and the market has rewarded them for it.

For the near-term, particularly the bellwether upgrade of expected revenue growth or guidance has given more feet to that comfort. But do we think that the valuations are there? I would say, on an absolute level, yes, but on a relative level, they're still better placed.

They generally are businesses, which benefit when the US economy goes through a downturn. Then we get to see more offshoring. So the volume trajectory is good and in the near-term outlook, as the companies are pointing, remains to be positive.

So overall, I would say that it merits a neutral stance and selectively on a stock basis, maybe an overweight stance, based on where we think the valuations are for specific businesses.

Mrinal Singh: Well, very interesting question. The good part about the E&RD business is that the purchase orders are long-dated. So they do offer good visibility for a long term, because that's the nature of that business. Those associations are not short-term oriented or three months or six months. They typically run for years.

But then, the other element of that is, that there are no lumpy optics and downticks that happen. Near-term valuations are more than conducive. I would say that the agnostic general IT plays are better-placed than pure E&RD plays, simply because the valuations are way too high.

Mrinal Singh: See, defence is a very peculiar place. I've observed this space for 20 years, where there were hardly any defence names to pick in the market. Now, we have plenty direct and indirect plays. But see, defence is a completely top-down investment.

The very nature of that business is that you know, a lot of details are classified and defence is a sector where economic rationale is not the only driver of business. It's a sector where performance is far more important than the economics, because that is to do with national security and whatnot. So, it is very difficult to actually do meaningful large-scale bottom-up investing in defence, per se. So it is a top-down investing.

Although we might have a view that the defence spending is going to increase. Yes, the trajectory is positive, but then it is also to a large degree a function of how the government financials remain. We have seen in the past that governments have deterred payments when their fiscal situation gets tight.

So it has its own risk. Just because the defence spending is going to have a positive trajectory does not mean that things will be hunky-dory for the sector. I think it's an ultimate top-down investing space. Very difficult to do a broad level of bottom-up investing. It's a perfect momentum vehicle and sector.

You will see fundamentally bottom-up investors not engaging in defence in a meaningful way and the broader valuation at this juncture looks just out of whack. I just can't make sense, given what risk it comes with. It just doesn't make sense to be in that space at this juncture.