“Large-cap stocks will perform well in near term” | Economic Times

Unlike the previous peaks, which were triggered by global flows, it is the local money this time. Retail participation is very high, aided by low interest rates and increased savings during lockdown, says Mihir Vora, Senior Director and CIO, Max Life Insurance. In this interview with ET Wealth, he shares his views on sectors he is bullish on, the commodity cycle and more on the stock market. Read on. The stock market has rallied significantly in the recent past. How do you see its prospects?Global liquidity is abundant and equity should do well till the liquidity perception remains like this. Aided by factors like the PLI scheme, low interest rates, inflows into mutual funds and significant inflows from private equity and pent-up demand, growth is likely to bounce back in the domestic economy. Global growth is stronger. Having said that, there are pockets of stretched valuations, especially in mid- and small-caps. Large-caps may outperform in the near-term.Growth in 2021-22 is looking good due to a low base. Where will GDP growth settle in 2022-23?GDP growth in 2022-23 should be around 7%. The full impact of investments made in the PLI scheme will start kicking in by then. Resilience of the IT sector is helping because a lot of jobs are being created. Money coming through the private equity route into new age companies is also creating a lot of jobs and resulting in increased economic activity. So 7% looks fine for 2022-23.What about the expected earnings growth in 2022-23?We expect around 35% earnings growth for Nifty companies in 2021-22 and another 15%-20% growth during 2022-23.PEs have started moderating. However, the market is still valued at higher levels. Does this expected growth justify valuations?PEs will come down further due to high earnings growth in the next two years. However, valuation will still remain slightly above average. Since other global market valuations are also high, we should be fine. Developed market central bankers pumped in around $10 trillion post-covid. This $10 trillion in one and half years is equal to what they did in the previous 8-9 years. It is no wonder that all assets are expensive now.These expensive assets need to moderate. How do you see things panning out?This trend of expensive assets is not new. I don’t think central bankers will withdraw this liquidity very quickly because the western world has created huge debt in the process of supplying liquidity and they need lower interest rates to service those debts. This is good for countries like India which need external capital for growth.What can upset this apple cart?Right now, inflation is a big risk. We have seen commodity inflation, mostly due to supply bottlenecks. Wage inflation in the west is another worry. So far, central bankers are treating these as transitory. If it is not, we may be in trouble because central bankers will be forced to take measures like tapering, hiking rates, etc to bring down inflation. How do you assess the situation in the commodity market now?I don’t think we are in a commodity super cycle. It looks like the recent spikes were triggered by supply bottlenecks and also due to the issues in China. Supply disturbances are negatively impacting other areas also— semiconductor shortage hitting the auto industry, jump in shipping rates hitting import and export etc. Looks like these disruptions will continue for another quarter.Isn’t the rupee a worry? Things were stable 6-7 years back; but RBI had to hike rates after the rupee started falling.We have a lot of forex reserves and the current account deficit is quite benign. Indian inflation is linked to global oil and if it continues to go up, it will be a worry for India. It will be a problem even if it stays above $90 for long.Any specific sector or themes you are bullish or bearish on now?So far, we were positive on global exporting sectors like IT, pharma, etc. However, with the economy on track again, we would like to look at domestic-oriented sectors like banks, automobiles, consumer discretionary, infra and construction, etc. Any other sectors you are bullish on? Sectors linked to government spending like road and port construction will do well. Defence related companies will also do well due to more indigenisation of defence equipment. Substitutes for Chinese imports like speciality chemicals, electronics, etc are other sectors that we like.What about the global sectors like IT?We are still bullish on the IT sector because companies should be able to do better than previous years. Though labour costs are going up, IT companies are able to pass it on due to a better demand environment. Demand is strong and it is reflected in the strong hiring trends across IT companies.Any segment you are bearish on now?Relatively speaking, global commodities may not do well if supply issues start getting resolved. Pharma may not do well incrementally because pharma is not the best choice during expected periods of domestic recovery. Many utilities stocks in power segment have been bid up due to expectations that many of these will invest in renewables. While these will be positive, it will take time to execute but valuations have already been marked up to the extent that future positives may already be in the price. Compared to large-caps, mid- and smallcaps have already outperformed in the past year. What happens next?As of now, I am more biased towards largecaps. Broader mid- and small-cap rallies may be over, but there are stock specific opportunities in mid- and small-caps.We have seen liquidity driven rallies in the past. Hope it is different this time.There is a big difference between previous peaks and this one. Unlike the previous peaks, which were triggered by global flows, it is the local money this time. Retail participation is very high, aided by low interest rates and increased savings during lockdown. While the equity market is at a higher level and is doing well, more foreign money is coming through the private equity and venture capital route compared to the FPI route.