Markets likely to stay in 'buy on dips' phase: Bernstein's Venugopal Garre

Markets have run ahead of fundamentals, but this has been a broad global trend, says Venugopal Garre

Despite a sharp run-up from their March 2020 low and high valuation, the markets are likely to stay in the “buy on dips” phase, with index returns remaining range-bound, but the broader markets generating returns, says Singapore-based VENUGOPAL GARRE, India strategist at Bernstein, in an interview with Puneet Wadhwa. Edited excerpts:

Would you classify India as a “buy-on-dips” or a “sell-on a rally” market?

The Nifty index valuation at 21x forward price-to-earnings (PE) is now at a historic peak. Near-term earnings, however, largely reflect the Covid-19 impact and hence, may not be a representative of the true earnings potential for corporates. Most returns have been driven by concentration into safer sectors and sectors delivering growth even in this environment. These include Reliance Industries (RIL), pharma firms, parts of the consumer sector. Covid-19-affected sectors have not performed well, with financials being the key laggard, followed by industrials and construction. A market decline from here may not drive a further correction in risk sectors, hence there will be natural support to the market until qualitative themes are in place. The market is likely to remain in a ‘buy on dips’ phase with index returns remaining range-bound, but the broader markets generating returns.

Have the markets run ahead of fundamentals?

Simplistically, what you say is correct, but these are unique times. Market valuations are rich in FY21 and higher than even in the post-global financial crisis (GFC) phase but appear to be at fair value with regards to FY22, as FY21 earnings reflect an unusual period with shutdowns and production impacts. The April-June 2020 quarter gross domestic product (GDP) of -23.9 per cent perhaps captures this impact fairly well. The markets have moved ahead of fundamentals, but this has been a broad global trend -- as the general consensus is that eventually there would be an endgame for Covid-19. Governments over the world are pumping liquidity and ensuring that this period is tackled well.

By when do you see corporate earnings at an aggregate level come back to pre-Covid-19 levels?

The level of recovery in earnings will vary across sectors. Information technology (IT), health care and consumer are in a positive growth phase this year, while some others, such as auto, will move into a positive zone by the third quarter of FY21. We also expect financials and industrials to move into a higher than the pre-Covid-19 level from early next year, as the overall economic activity starts to improve. In the case of most-impacted sectors, such as airlines and hotels, we broadly expect a normalisation only by FY23. The Nifty index, after a flat growth this year, is expected to see earnings growth of 35 per cent next year, with a rebound assumed for most sectors.

A number of businesses have opened after the lockdown. Do you see demand also returning at the same pace?

Consumption demand has varied across end-markets. While staples have held up, discretionary was impacted and is slowly returning back to normal. Part of the discretionary recovery is also propped by pent-up demand and hence the pace of improvement over the past month has moderated, and the momentum companies are seeing in their production run rates is largely to meet pent-up demand. Weaker demand is one of the reasons for some companies clamouring for goods and services tax (GST) rate cuts. The impact on consumer incomes, in our view, is largely among mass-market consumers; the upper-middle class has seen less impact, which we believe, will define consumption patterns with the exception of categories where there is room for downtrading. Therefore, we expect mass-market products to see a moderation in momentum, and mid-end segments to hold up.

What has been your investment strategy since March 2020 low?

In our Bernstein India portfolio, which reflects our strategy stance, we have been broadly running a portfolio with high earnings visibility. We had higher weighting to IT, new economy (RIL), which we added in the Covid-19 fall in March, and telecom, and select exposure to consumer electricals and autos in the Covid-19 period. We had limited exposure to financials and industrials. After the initial phase, in July we increased our weighting a bit to financials and autos. Last week, we added health-care stocks to increase the level of defensiveness of the portfolio -- as health-care earnings visibility is strong and less dependent on domestic macros.

How are foreign institutional investors (FIIs) looking at India now?

Over the past month, I have interacted with over 100 FIIs and have observed an increased interest in India. This, in some way, reflects in the step-up in investments in India in recent months, more led by participation in the follow-on offerings from various companies. There are three main concerns cited by FIIs: 1) Ability to control Covid-19 as cases continue to increase; 2) government balance-sheet challenges and hence, lower ability to drive growth through fiscal stimulus; and 3) rich valuations of the market.