ETMarkets Fund Manager Talk- We’re more bullish on consumer discretionary than staples sector: Avendus Olivo PMS

Markets have scaled lifetime highs and FII inflows remain strong. Would you say India is in the initial stage of a strong bull market phase?
That the markets are at an all-time high is merely optical. Just as in the past, markets will inevitably continue to hit and surpass several all-time highs over time in the future. This is purely because of ‘Growth’. Economic growth and with it, corporate earnings growth, will keep getting reflected in index levels, albeit with continued volatility. So, we think, there is nothing special or intimidating about all-time levels.

We think India’s narrative is changing fast. India has shown resilience, which will continue, given vast improvement in our macro-economic stability and higher visibility of growth. India will remain the fastest-growing major economy in the world over the next 5 years at least.

India is largely a domestic consumption-driven economy, which relatively insulates itself from a potential global slowdown/recession. This, along with key reforms undertaken in recent years will help India’s structural growth to remain ‘stronger for longer’.

India’s corporate sector is recording high earnings growth with improving profitability and healthier balance sheets. Peaking of inflation and thus, interest rates should further support earnings growth. Given this, we remain quite positive on Indian markets.

How comfortable are you from a valuation perspective, be it large-, mid- or small-caps?
We believe valuations are quite at a comfortable level. In fact, we would argue that valuations need to be at a premium to last 5/10/20 years averages of around 18-19x one year forward P/E. This is because the Indian economy and corporates are far better placed on growth, quality of growth, balance sheet of the economy and corporates at large, going forward.
What kind of asset allocation would you recommend investors at this stage?
As always, asset allocation is a function of one’s goals, risk tolerance and investment horizon. But in general, we believe there is merit in raising weightage to equities as an inflation beating, higher risk adjusted return asset class.

What’s your view on the consumption sector given that the rural market is yet to see visible recovery? Would you be buyers in any of the names?
We are very positive on the ‘consumer discretionary’ sector as against ‘consumer staples’. India is a consumption driven economy. As we cross higher per capita income levels, which is already happening, many erstwhile discretionary consumption sectors are increasingly becoming non-discretionary.

We are seeing a lot of premiumisation as well. Within the so called ‘consumer discretionary’ sectors we like quick service restaurants (QSRs), auto, telecom, home improvement and proxy segments such as private banks.

Which theme is likely to play well in the rest of FY24? Growth or Value?
We are style agnostic, and we do not differentiate between value or growth style factors. We think value is not a statistical measure. A company’s worth is the present value of its future cash flows.

However, it has become popular to use price multiples as a crude approximation of this. We believe that relative valuation measures, whilst useful, need to be interpreted carefully.

The low valuation in a ‘Value’ stock could be reflective of an inferior business with a low growth outlook. Thus, a low statistical measure, say in terms of P/E ratio, may not necessarily be reflective of an attractive investment opportunity.

Similarly, high valuation in a ‘Growth’ stock could also be reflective of strong confidence in the growth outlook of a business’s cash flows.

Thus, a high statistical measure, say in terms of P/E ratio may not necessarily reflect an unattractive investment opportunity.

A growth stock can be a ‘value’ bargain if the business continues to surprise positively on the growth front. At the same time, a value stock can start delivering on higher growth. A ‘Change’ in business fundamentals is what is required.

For us, value and growth are not mutually exclusive, but are complementary in achieving diversification in a portfolio.

Do you have exposure to the defence sector? What opportunities are you seeing this space given the emphasis given by the government on reducing import dependence?
We do not have any exposure to the defence sector, but are willing to study the prospects. We would like to examine longevity of growth out here, dependence on government expenditure, margins profile and most importantly, working capital requirements.

What major upside and downside risks do you see for equities in the near term?
The biggest upside risk is strength of growth in comparison to the rest of the world and the confluence of FPI and DII buying. Domestic equity inflows are becoming ‘sticky’ as represented by SIP inflows in MFs.

Equities as a domestic asset class is becoming mainstream and it is heartening to see retail investors acknowledging the power of long-term equity investing.

At the same time, from an FPI perspective, India is becoming ‘too big to ignore’ by virtue of the size of the economy (5th largest now), the size of the market, and its weight in emerging market indices, which has doubled in the last 8 years.

The Indian market is also much deeper and broader than all emerging markets other than China. This should prove positive for FPI inflows, as we are already noticing.

The downside risks are mostly external – risk of a global slowdown, geopolitical crisis, and ‘higher for longer ‘ interest rate cycle in the world.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)