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    India does relatively well when global growth is subdued: Harsha Upadhyaya

    Harsha Upadhyaya, Kotak AMC-1200

    Story outline

    • Keep your powder dry and look for opportunities.
    • If you lose hope, then equity is not an asset class for you.
    • FMCG and retail will feel a minimal impact of slowdown.
    Our thesis has been that whenever there is subdued growth in the global economy, India still does well from a relative growth perspective, as well as from a profitability perspective, because most of the commodities remain in a range, says Harsha Upadhyaya, CIO- Equity, Kotak AMC. Excerpts from an interview with ETNOW.

    What kind of phase are we going through in the market? Is it time to conserve cash or to start putting the cash into whatever you are sitting on because the market has become fundamentally cheap?
    Clearly the time has come to start looking at equities, but that does not mean that one should be very aggressive at these levels. While the macros have been mixed, the valuations have come off. They are not as attractive as what would entail a complete lump-sum investment at this point. But at the same time, investors will definitely make money if they invest at lower valuations. We have seen that broader markets have corrected in terms of valuations over the last two years or so. While immediately there may not be any shining stars, but if you stop investing at this point of time, you may not be able to make a lot of wealth over the long term. So ideally one should continue investing at these levels as well. But again, you have to keep some gunpowder dry and look for opportunities if there is more volatility in the market.

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    How does one figure out that the market and economy will get worse before it gets better or whether the bad has already gotten worse and will start getting better now?
    If you look at valuations from a historical perspective, they have come off from the peak and are not as good as they were in the beginning of 2014 or end of 2013. So to that extent, there could be more downside if you simply go by a historical valuation range. And also when the economy is slowing down or has already slowed down, the management commentary, the anecdotal evidence, etc, is going to be very, very depressing and disappointing. This is the time when you have to keep patience and keep investing in the market with the hope that at some point of time there will be a recovery. It will be very difficult to point out when that recovery would be.

    In our sense, the recovery would happen when the transmission of lower interest rates would start happening in the economy. We have already seen about 110 bps repo rate cuts, but that has not gotten transmitted completely simply because there is a disruption in the fixed-income market. The companies that require money today have not been getting funds. Those who do not need it have the benefit of lower interest rates, as well as transmission. That needs to change and when that happens, I think slowly growth will pick up. Yes, it is a challenging time. But if you lose hope, then I guess equity is not an asset class for you simply because when you get equity at lower valuations, you will only be able to make more money when you keep patience.

    What sectors could you look at and, of course, the bigger question -- whether you should buy the decline? Are there pockets where you believe that the valuation is right while the growth story is still intact or at least there is visibility after the slowdown?
    Clearly there are three buckets of valuations in the market today. There is one bucket which is still expensive, but there is some visibility. For example, the FMCG sector despite the slowdown is one of the steadier set of businesses in this market. They continue to have better visibility compared to many other sectors, but the valuations are high.

    For IT, I would at least put the large caps within the same basket. Then you have fair range of valuations for many other sectors such as private-sector financials and some others. Then you have the third bucket which is completely beaten down today. There is no visibility. While it may look like they are very attractive, we really do not have the visibility to go ahead and make a large sum of investments into those set of sectors.

    Our approach has been to look at all three buckets, manage having a reasonable degree of insights into where the slowdown is and how long it can continue and see whether the current valuations give any margin of safety. If we find some margin of safety, we would enter into that space. It may not be any sector or a theme as such, but from a bottom-up perspective, wherever we feel that cash flows are steady -- while there is a slowdown in the economy the stocks are showing a subdued growth -- we are still okay. But we do not want to enter into companies that have governance issues or where the business model itself has changed completely in the recent past.

    The auto names must be quite a 'no-no' as they seem to be going through a cyclical slowdown with the big structural overhang of EV stepping in?
    As you know, we had cut our auto position sometime in the beginning of 2018 itself and continue to remain negative on the industry. While optically it may look like the valuations have corrected because the stocks have fallen 40-50% from the peak, when you look at the earnings trajectory for some of these companies and look at the current valuations, they are still expensive. Given that and also the medium-term overhang of what happens to the auto sector given the increased penetration of shared mobility; the likely competition that will come from electric vehicles, etc. I do not think we are in a position today to thump the table and say that stocks have corrected and that at these valuations there is no risk at all. We still believe that there is enough risk in the auto sector given where things are.

    How does one understand the global environment? What happens when bad global headlines start hitting us? We are getting hit and haunted by local bad news of slowdown, job cuts, recession and the auto problem. I shudder to think what happens when we get smashed from both the sides.
    Global headlines are hitting us even now. While there are silver linings like the commodity prices -- especially the crude oil price which has settled around $60 to a barrel -- that are a positive for our economy and companies in terms of profitability, etc. But yes, there have been clouds in the global economy as well. Our thesis has been that whenever there is subdued growth in the global economy, India still does well from a relative growth perspective, as well as from a profitability perspective, because most of the commodities will remain in a range. That is a scenario where Indian corporates will really do well on the profitability side, except for those who are directly dependent on the prices.

    Today the house is divided in terms of whether it is going to be subdued growth or a recession in the next few quarters. To that extent, our belief is that if it is subdued growth, then we are in a better position and will get some levy to correct whatever has happened in our economy because of lower commodity prices. But if it enters into a recession, then obviously there is an impact on our economy as well.

    Anything in the midcap space -- the mood, crowd, general view -- that you are happy to go against because maybe sentiments and technicals are having an impact on the stock, business, company or sector?
    Yes, we have been buying mid and smallcaps over the last few months and we will continue to do so. But it has not been a particular theme of investment as such. There have been some stock-specific opportunities that we are getting every now and then due to external or technical factors. For example, how the market has seen some of the pledges going up or going down, etc. Overall we have been cautious, but we have been investing in mid and smallcaps and that strategy will continue into the future as well.

    The earnings numbers have been mixed. Paints companies and retailers have done well. Asian Paints and Berger Paints numbers were good, Trent came out with good set of numbers. Aditya Birla Fashion numbers were not bad, D-Mart same store sales is still growing. But auto sales have plummeted, FMCG companies are feeling the heat. What is happening in the economy?
    I would differentiate paint from retail or FMCG. Our belief is that FMCG and retail will also feel an impact of slowdown, but it will be very minimal compared to some of the consumer discretionary sections of the business. We will continue to have a reasonable earnings growth, both for FMCG as well as retailers.

    If you look at paints, while they have delivered great numbers last quarter, maybe with the lag, there will be an impact on the paints segment with the economy slowing down because at the end of the day, usage of paints is a discretionary theme and that is also going to slow down going forward.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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