4 sectors Mahesh Nandurkar is bullish on for near term

“So in many ways the easy environment for equity investments that we had seen over let us say from 2010 to 2020 is not really there anymore so we have to be cognisant of that fact. Yes but having said that I think now seems to be the time to start buying,” says Mahesh Nandurkar, Head of Research & MD, Jefferies.

All the global and local brokerages are now saying that it is time to buy India. Is it really time to buy India?
I think the valuations have clearly come back to a more palatable level. We are trading at 17 times one year forward earnings and this is in line with a historical average. In fact if we look at the valuation comparison with the other emerging markets and other Asian ex-Japan kind of markets that is also in line with the historical averages. So I think one the valuations have come down to curve back to historical average levels. The second point is that the macro situation from an India perspective is also actually reasonably okay. I mean we are looking at the rate cycle peaking out. We are also looking at the current account deficit for this year and also the next year is turning out to be much lesser than what was initially feared. The oil prices have also corrected. The commodities are down. So in many ways I would say that one should be looking at investing in the markets from a longer term perspective. Yes from a shorter term perspective things are still quite confusing especially from the global perspective. There are likely to be some more negative news coming out from elsewhere in the world but I guess the long-term investors should be adding here.

So are we in for a slow second half and a good second half?
Yes, I think it looks like because the near term probably is still a bit sketchy for the markets more because of the global developments. So second half should definitely be far better and yes I mean we are not going to be seeing super normal returns but clearly what has changed over the last I would say a few months or let us say like one year or so is that the central bankers all over the world have stopped printing money. They have started adjusting their balance sheet, the rates have gone up. So in many ways the easy environment for equity investments that we had seen over let us say from 2010 to 2020 is not really there anymore so we have to be cognisant of that fact. Yes but having said that I think now seems to be the time to start buying.

Just wondering what is going to be the construct of the market say in the next six months to come because what one has seen is that there has been a stark underperformance from not just blue chips but individual sectors. Where do you think the leadership and underperformance is going to come in from say in the next six to twelve months?
What has happened with the banking sector is also that in general over the last one-one and a half years we have seen heavy selling from foreign institutional investors. And we have seen selling almost to the tune of around $30 billion and what we have seen historically also is that when the foreign institutional investors sell the banking sector typically ends up underperforming.

But my sense now is that the foreign investor positioning in India is very-very light. In fact I will go to the extent to say that it is at the lightest level that I have ever seen in the last 10 years. Several large funds that we interact with are underweight on India and the reason for them to go underweight over the last few quarters has been the extreme valuations.

But as I mentioned those things are correcting as we speak. So my sense is that from here on the foreign flows should be on the positive side and not on the negative side and that should primarily be one of the driving forces for the banking and financial sector which is also incidentally the sector where the valuations are corrected quite significantly. They are trading at much below their last 10-year averages so looks pretty attractive.

I clearly believe that it is the domestic cyclicals that should do better which include banks, NBFCs, I would also say industrials. In the near term, I would also be looking to own consumer staples as well. I think the concerns on monsoon being weak and therefore rural demand getting impacted etc. to my mind are overdone. We have to keep in mind that rural is not agriculture and vice versa. Rural or the bottom of the pyramid is far bigger than agriculture. I mean agri GDP is about 16-17% of total, rural is about 40-45% so there is much more to the bottom of the pyramid demand than agriculture. I think the non-agri segment is basically driven by the other services; the construction services.

Construction sector has seen pretty strong and robust trends both on the infrastructure side as well as the housing construction side as well. So that is the reason why I would be adding staples here as well. And by and large I still believe that the outlook for the global growth has got worsened and the domestic growth outlook is looking far better so would look to overweight the domestic sectors rather than outward looking sectors.