IT and telecom will do well in the medium term: Vinay Paharia of Union AMC

In a Q&A, Paharia says the economy is expected to recover sharply driven by base effect and pent-up demand, and that govt's 'AtmaNirbhar' packages are likely to provide a fillip to manufacturing

Following the sharp rally in the markets, valuations have slipped into the premium territory, according to Vinay Paharia, Chief Investment Officer, Union Asset Management Company. In an interview to Samie Modak, he says the outlook for equities remains favourable on the expected rebound in the economy. Edited excerpts:

Do you think the markets have run ahead of fundamentals?

Based on our internal analysis, markets are trading at a small premium to their current fair value. This value is likely to compound strongly, driven by economic growth. Therefore, we remain optimistic about investing in equities, with a medium-to-long-term time horizon.

What’s the outlook for next year?

The economy is expected to recover sharply over the next year, driven by the base effect and pent-up demand. The government has incentivised the manufacturing sector through its Atmanirbhar package, which is likely to provide a fillip to the sector. Central banks across the globe are focusing on growth revival, having pledged accommodative monetary policies.

Do you expect value stocks to gain traction?

We have seen bargain stocks do well this year, as their share prices have tried to catch up with the underlying fair val­ues. However, it is difficult to predict when and how quickly such convergence could happen. Therefore, we advise investors to hold a blend of growth and bargain stocks, or funds, in their portfolios. 

Which are your preferred sectors?

We expect sectors such as IT and telecom to do well in the medium term. IT has seen a meaningful rise in demand, given the pande­m­ic. Firms are accelerating IT spends, which is happening for survival and not growth. Telecom is expected to witness benefits of consolidation and rise in demand, given the increased data consumption by both consumers and enterprises. 

Firms in the pharma sector are likely to witness tailwinds from exports, as various international corporations intend to diversify their vendor base away from China. Further, the pricing and regulatory enviro­n­ment have, on the margin, started to improve for the sector.

What’s the view on the financial pack?

We are now ‘equal weight’ on banking and financial services. This sector is likely to see significant impact of the pandemic, in terms of weak gro­wth and higher credit costs. 

However, we think valuations are attractive from a medium-to-long-term perspective. Most of the good quality banks and NBFCs have made healthy provisions for expected credit costs, and are well-capitalised. Further, this sector is likely to be among the biggest beneficiaries of the impending recovery next fiscal year.

MFs have been big net sellers this year, especially in recent months. Why is that so?

MF investors have reduced equity allocations this year, given the extreme volatility. However, considering the extent of drawdowns, we have seen investors become more mature towards market volatility now than in the past. We expect investors to rebuild equity allocation as volatility subsides. 

Do you think MFs have lost out on latest gains?

We have not seen en masse redemption despite significant drawdowns experienced this year. Our advice to investors is to remain invested in the markets for a long time period, and not be worried about short-term fluctuations. 

What are the near-term risks?

A higher-than-estimated economic impact on companies due to the pandemic, and interest rates hardening given the rising inflation, are risks that investors should watch out for.