When it comes to Indian stock markets, the million dollar question is valuation. Benchmarks have climbed so far this year and remain near life highs. Last week UBS gave a pessimistic view of the magnitude of the rise in equity indices and speculation is rife that the indices are set for a correction. Lav Chaturvedi, CEO and Managing Director, Trusted Securities, estimates there is a 10 percent increase by year-end. In a candid conversation with ETMarkets.com, Chaturvedi explains his reasoning. Edited excerpts:

My first question concerns the evaluations. Clever, Sensex are both at lifelong peaks. Are valuations stretched? What upside do you see for benchmarks?
There are two aspects to this. I want to summarize, and then I will answer your question specifically. Overall, based on one year futures earnings, the market is around 30-35% premium, or 18x to 23x. It is the multiple to which we are. However, that said, some components are still included in the Nifty benchmark in recent years, such as

, SBI Life, have a higher P / E multiple than the excluded stocks. Therefore, part of the premium came from there. In addition, better visibility of the earnings rebound after the second wave of Covid-19 resulted in a higher premium for the market and also from a market capitalization perspective to GDP.

We further note that the spread between G-Sec yield and Nifty’s earnings yield has grown to a historic average of 190 basis points, which may be of concern in the near term. Overall, however, the markets have risen and from now on we would likely see another 10% jump towards the end of the year. It is something that we are seeing. There might be a few fixes along the way, the trip will have a few bumps, but overall whoever is invested will likely see around 10-15% by year over year.



From the point of view of a mid cap versus a small or large cap; Which part do you think right now holds the most value?
It’s up front. We have seen significant growth in large cap stocks. But it will be broader and mid and small cap stocks will likely continue their momentum given better visibility on sustained earnings growth. However, in addition to profit growth, investors should focus on generating cash flow and corporate governance of companies.

There will always be specific stocks and specific opportunities within the indices will likely provide opportunities and the corrections will provide an entry level and another opportunity for anyone in retail or anyone who has not entered until now. .

In particular, each bullish phase creates winners, which causes midcaps to turn into largecaps. We already have many examples like Shree Cement, Tata Consumers,

, Adani Ports, Divi’s Lab, SBI Cards, among others.

There has been a flurry of IPOs since the start of the year. What are the challenges of promoting these new market entrants?
In 2019, from about $ 2.5 billion in the primary market (which is the IPO) to nearly $ 12 billion so far in 2021, it’s been a phenomenal journey. LIC and Paytm are among others that could arrive this year. So this is clearly a year of fundraising.

A year with a lot of primary activity is very good because it provides risk capital.

Valuations for global IPOs or more specifically new age companies will likely depend on what has been planned and the investment horizon. Obviously, if one goes for the IPO of LIC versus the IPO of Zomato or Paytm, it will be from a completely different perspective. While the IPO of LIC is based on the current basis and on a certain rate of growth going forward, new age technologies like Paytm or Zomato will likely be more based on a slightly longer term.

Anyone who’s around for the long haul… these types of IPOs will definitely benefit them. However, there are some players who are not for the long haul. More conventional IPOs will likely be better for them.

What does the earnings season tell us so far? Is the financial sector out of the woods in terms of asset quality?
Profits so far have been decent and as a result the markets are doing well. However, input cost inflation has proven to be a major concern for the market over the past two days.

As to whether asset quality is out of the woods or not, the RBI Financial Stability Report says it may take around four to six quarters for banks or loan companies to recover from the impact. full of any recession or event like Covid-19.

So far so good, but I’d like to keep an eye on this for at least two more quarters so we can see how it’s going to play out, but all the policy responses that have been made so far on the plans monetary and budgetary space were favorable.

But we still have two quarters to watch.

We have seen that so far this month the rupee has taken quite a hit due to a combination of factors; we have oil prices, we have the US Fed talking about phasing out, and so on. Some companies like those in the IT industry might benefit, but what are the broader market implications of the depreciation of the rupee?
The rupee is generally a function of two main components; one is internal policies – how are interest rates and the second is external cash flow and liquidity in addition to the prices of crude and other commodities.

There was an interesting article that said the US exercise option goes up to over $ 200 for Brent crude. It’s even phenomenal to read that.

Clearly, in the short term, crude is likely on an upward trajectory until a correction is made by OPEC.

There are two key things that will play for the currency in the near future; one will be the actions the Fed takes to shrink or in what form and in what manner.

This will likely determine the flow of liquidity and this is where the currency game will come in.

And the second is how do local interest rates or national interest rates move? These two combinations will likely see where the rupee goes from here. Overall, it might be hovering around the range on a slight weakening, but it won’t be too much.

It will be around the range depending on what the Fed is doing and how national interest rates move.

Recently, even the Governor of the Bank of England has spoken of tightening monetary policy. The Fed has given a clear timetable that by November bond purchases will be reduced. In terms of the flow of FII entering India, do you think there would be a significant impact once this all started in the advanced economies?
As we have seen in the past, tapering by itself does not reverse the flow of funds. It’s more if something is done beyond expectations.

Anything that has already been assessed or taken into account will have no impact on the IFIs.

If something is done beyond what was planned, there may be some impact. However, the good part is that India is a strong history and a robust influx; this will likely offset some of these reversals due to interest rate or currency arbitrage.

So overall, we do not expect on a more structural basis that the flows of REITs or FIIs will be reversed.

Yes there might be a few months here and there there might be some fixes depending on the event but overall you should be fine.

Much has been said recently about the inclusion of Indian bonds in global indexes. RBI talked about it. Numerous research reports, including major foreign brokerage firms, have spoken about it. Would this be a game-changer for Indian financial markets?
Personally I believe this will be the case and if you had noticed there was a recent comment from the vice governor as well that the inclusion of Indian bonds in global indices is somewhat of a trip to convertibility. of the capital account.

This kind of roadmap that we are moving towards is very transformative for India to have such a foreign flow. But it has its own impact and as long as it is managed it will be a big plus for a country like India where there will be debt fund and infrastructure finance and a lot of that positive money will probably flow in.

We just need to make sure that the ecosystem has been treated in such a way that we are ready for the capital account convertibility that we have been talking about for a long time.

In the latest policy, the RBI kept interest rates unchanged, but halted its government securities acquisition program and increased the size of its floating rate repurchase agreements. Some have taken this as a precursor to some degree of standardization. Do you think the RBI could run the risk of falling behind if it doesn’t do something like a repo hike by December?
Personally, I don’t think so. Everything that is done meets expectations. There are numerous reports that actually predict when the central bank’s interest rate cycle will begin to normalize to the pre-Covid level.

A timeline of the next 12 to 18 months is probably a reasonable timeline because we have to see that it’s not just price stability, but also the economy and growth that need to be balanced. Anything that is done prematurely on one dimension also has an impact on the other dimensions?

Yes, 100% India will be. Personally, I think India will be in both the top 5 and the top 3 when it comes to the best performing market. The only thing we have to see is that hopefully it’s going to be dollar-based because that’s where the currency comes in and it’s probably going to be a much stronger story and I think even there we have a good chance.


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