‘Correction in the Market is Overdue’

‘A time-wise, as well as price correction, so that the market can absorb the gains made over the past 17 months.’

The recent below-par debut of issues at the bourses after they hit the primary market has left investors worried.

Jyotivardhan Jaipuria, founder and managing director, Valentis Advisors, tells Puneet Wadhwa that this may disturb retail sentiment and have a cascading impact on the secondary markets, too.

What’s your view on the outcome of the US Fed’s Jackson Hole meeting?

The Fed chairman has indicated that tapering is likely to start by the end of the year, and this may induce a long- awaited correction in the markets.

That said, India is in a better shape than in 2013.

First, India’s current account deficit was 0.9 per cent of GDP in FY20; there was a current account surplus of 0.9 per cent in FY21 compared to a current account deficit of 4.8 per cent in FY13.

Second, forex reserves of India have more than doubled from $294 billion in May 2013 when tapering was announced to $613 billion currently.

Is a significant correction on the cards?

Over the past 15 years, there have only been two years when the market did not correct by at least 10 per cent during the year.

In the current rally, we have not seen a double-digit correction since May 2020, and to that extent, a correction is overdue.

We expect a time-wise, as well as price correction, so that the market can absorb the gains made over the past 17 months.

However, this correction will only be a pause in the long-term bull market and will be followed by the next leg of the rally driven by a strong earnings recovery.

Which factors can trigger this?

Valuations are not cheap and retail sentiment has turned euphoric, which make us believe the market is set for a phase of consolidation.

We are also watching the US bond market that seems to be indicating a slowdown in the economy, maybe due to continued Covid infections, as a bigger risk.

In a correction, some stocks that have led the rally like metals and some domestic cyclicals underperform the market.

On the other hand, laggards like consumer staples can outperform by falling less.

However, our view is that earnings growth over the next few years will be driven by cyclical sectors.

Hence, we will be buyers on dips in these stocks.

Can inflation become a spoilsport?

Yes, and it is not just due to poor monsoon.

We have seen a surge in metal prices and that will have a cascading impact on most product prices.

Second, logistics challenges have led to increased costs, as well as higher-than-normal inventory stocking will lead to higher product prices.

Overall, central banks across the globe will keep debating whether this inflation is transient or structural.

In which sectors and stocks, you find valuation-wise comfort?

The easy money has been made, but the market is still attractive from a medium-term perspective.

The returns in the market, so far, have been led by valuation rerating and now the onus shifts to earnings.

We expect a doubling of earnings over the next five years and that should drive double-digit returns in the market.

While the market is not cheap, there is strong earnings growth potential in the domestic cyclicals.

We remain bullish on domestic manufacturing and will play this theme through cement, capital goods, and corporate banks.

There are interesting stories in real estate proxies like ceramics and cables.

Do you see a deeper correction setting in mid- and small-caps?

The moves in small and mid-caps tend to be sharper than large-caps, on both upside and downside.

Hence, they may underperform large-caps in a correction, especially given their strong near-term outperformance.

While valuation differential has narrowed, small- and mid-caps are likely to outperform large-caps over the next couple of years.

Why do you think so?

First, large-caps have still outperformed small-caps over a three-year period.

Second and more important, we think earnings for small-caps will grow much faster than large caps, given our expected economic revival.

Do you see retail participation dip once a correction sets in?

Structurally, Indian retail investors will continue to invest a larger part of their savings in the equity markets.

Better access to the stock market, as well as information on companies, especially with digital platforms, will make retail investing in the markets easier.

But, yes, we will see some reduction in the euphoria, especially in the IPO markets once a few IPOs list below the issue price.

Can the heightened primary market activity keep the secondary markets in check as liquidity gets sucked out?

While that is a legitimate concern, my bigger worry is steep valuations.

Our worry is if a few large issues list below the IPO price, it can disturb retail sentiment and have a cascading impact on the secondary markets.

Do you plan to rejig your portfolio strategy over the next few months?

We continue to play a barbell strategy with an overweight stance on domestic cyclicals at one end and an overweight stance on pharma at the other.

Tactically, we have increased cash in our portfolio to 12-15 per cent by selling some pharma names.

We will be looking at corrections to add to our positions in economy sectors like cement, capital goods, and financials.

Feature Presentation: Aslam Hunani/Rediff.com

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