Market rally driven by strong Q1 show: MD-CEO, Motilal Oswal Private Wealth

In a Q&A, Ashish Shanker says market moves will mirror the likely earnings growth of 12-15 per cent for the next few years

Corporate earnings growth and low interest rates are likely to provide a cushion to the valuations going forward, says Ashish Shanker, Managing Director & CEO, Motilal Oswal Private Wealth. He tells Ashley Coutinho that market moves will mirror the likely earnings growth of 12-15 per cent for the next few years. Edited excerpts:

Q. What do you make of the current market rally?

The equity market rally over the last year has been driven predominantly by corporate earnings growth. Corporate earnings growth and low interest rates are likely to provide a cushion to the valuations going forward. The performance of an equity portfolio going forward is likely to be driven by stock-specific earnings rather than the kind of macro rally we witnessed last year. Return expectations from equities need to be tempered. Over the next few years, if we expect nominal GDP to grow at an average of 10 per cent, then earnings growth could be between 12-15 per cent and market movement is likely to be in line with such earnings growth. The key risks continue to be any extension of lockdowns, resulting in slower economic recovery.

Q. How do you view mid and small cap stocks at this juncture?

Companies in the mid & small cap categories, which are leaders in their respective industries, which demonstrate pricing power, and low debt, are likely to gain market share from their peers. However, it is important to note that for the headline indices, there is no valuation arbitrage between large cap and mid & small caps. Given relatively higher volatility versus large caps, a mid and small cap biased portfolio needs to have a minimum investment horizon of around five years.

Q. What is your take on corporate profitability improving a year after the pandemic?

An analysis of the top 1,000 profitable companies shows that their annualized profits have increased from Rs 5.25 trillion in June 2020 to Rs 10.8 trillion in March 2021. The P/E ratio of this group of companies based on reported trailing 12 month (TTM) profits is about 27x, while the P/E ratio based on annualized profits is 20x. Annualized profit for the last reported quarter assumes higher significance than TTM earnings considering earnings disruption in FY21 due to lockdowns. At the same time, for the loss making companies within the top 1,000, the loss pool has come down significantly from Rs 70,000 crore in Q4 of FY20 to Rs 25,000 crore in Q4 of FY21. If we consider the BSE200 universe, for the period FY20-23E, stable sectors including IT, pharma and consumers are expected to grow earnings by 15 per cent, while cyclical sectors including corporate banks, commodity, energy, cement are expected to grow earnings by 41 per cent.

Q. Has the risk-on sentiment returned among high net worth or wealthy investors?

Wealthy investors have become far more risk-tolerant than a year ago. Direct equities has seen the highest traction over the last 6-9 months on the back of the domestic equity market rally. Investors have also started considering global portfolio diversification, especially to US equities, either through INR-denominated international feeder funds or through the LRS route. The US equity market has been one of the top performing markets globally over the last decade. The top technology and consumer-tech companies in the US offer true diversification as these kinds of businesses are not available in the listed space in India. Over a period of time, INR depreciation can also add to performance of such global portfolios.

Q. Are there any takers for credit risk funds, AT1 bonds and private equity right now?

Credit risk funds have witnessed a sharp drop in their net YTMs over sovereign/AAA-rated instruments. This reduction in credit spreads has led to fixed income investors incrementally preferring high quality portfolios. AT1 bonds saw high volatility at the beginning of FY22 given regulatory changes in valuation policies for mutual funds holding such instruments. Subsequent to the initial knee-jerk reaction on yields, there has been a pick-up in demand, albeit limited to AT1 bonds issued by the largest domestic banks with call dates over the next 1-3 years. On the back of the rally in the listed equity market, the unlisted market has also witnessed a pickup in demand for private equity and venture capital funds.

Q. What are your views on gold as an asset class at this juncture?

We continue to maintain that gold is a hedge against heightened volatility and should be treated more like an insurance within asset allocated portfolios. Depending on their risk-profile, investors can allocate around 10-20 per cent of their overall portfolio in gold, either through gold mutual funds, digital gold, or sovereign gold bonds.

Q. How has digitisation changed the wealth management business in the aftermath of the pandemic?

Digitisation is enabling and disrupting retail financial services with the advent of internet-only platforms. However, the HNI space is likely to remain “phygital” with interactions being a mix of digital and physical but transactions getting executed digitally.

Q. What are the plans for Motilal Oswal Private Wealth in the coming months?

At the onset of the pandemic, we realized that with domestic interest rates at decadal lows, conventional fixed income solutions, especially high credit quality portfolios, are unlikely to provide a yield higher than inflation. Based on our study of the behaviour of five asset classes including domestic and US equities, debt and gold over the previous 30 years, we put together a proprietary framework for a rule-based asset allocation. The resultant strategy is a superior alternative to fixed income investments, within our in-house managed-solutions platform called Delphi, which will be our core offering going forward.