Investors need to be careful in terms of deploying fresh money: Krishna Kumar Karwa

“I think if we look at valuations of individual companies, etc, in the last three months we have seen many of these company prices have moved up by say 20%, 30%, etc, so I think the valuation comfort is no longer there,” says Krishna Kumar Karwa, MD, Emkay Global.

It has been a heck of a bull market. Do you think this summer rally of 2023 has still some more steam left?
Yes, because macro were playing out in terms of inflation, interest rates, etc, all those positives were playing out and we also saw massive inflows from overseas post the China trade did not play out the way it should have. So, I think that part is done with. Currently also macros continue to remain very positive in terms of inflation being under control, interest rates also expected to be benign or rather not going up at least.

But I think if we look at valuations of individual companies, etc, in the last three months we have seen many of these company prices have moved up by say 20%, 30%, etc, so I think the valuation comfort is no longer there.

My sense is it is going to become more and more difficult. It is going to be very much bottoms-up kind of a market where investors will have to figure out where there is still value left and stay invested in those kinds of companies or look to invest in those kinds of companies but the big momentum has already played out and there is a fear of missing out because many people have missed this move also, so to that extent corrections could be shallow till everybody who left out has not yet got in.

Where is the margin of safety and where do you think market still has some more steam left where 15-20% upside or a 10% to 12% upside in large cap stocks is still left in next 12 to 18 months?
I think some of the sectors which in the last two years have not done well and, of late, at least valuations seem to be in their favour and we have seen some move already coming in.

So, I have been talking about insurance sector for some time and now it has started playing out where the margin of safety was very high in terms of the valuations, so that was one segment where you could see.

Another segment I think which has not done well in the last 12 to 18 months, relatively smaller segment, but again the whole agrochemical space for various reasons including supply chain.

I think the valuations of many of those companies have come down to very attractive levels so this is where some valuations should favour you. Otherwise, in your banking sector, yes, the smaller banks, I think they do offer you opportunities where valuations are still very reasonable, growth momentum seems to be good so a maybe catchup trade could happen over there.

But having said that, I think opportunities to invest are becoming very-very limited because valuations do not seem to be in favour. Most of the run-up has already happened and wherever there is a momentum, I think stocks are discounting maybe two years and three years in advance so I think investors need to be very careful in terms of deploying fresh money.

In fact, this could be an opportunity for many investors to look to cash out in segments of the market where the discounting is more than two years.

I wanted to understand where do you sense that there is now exuberance in the market? Any sectors which you think are overrated at this juncture and you could burn your hands if you continue to deploy more money or even hold those positions?
I do not deny the opportunity as far as the defence is concerned. But look at the valuations of many of those companies. I think there is clearly a sense of exuberance which is prevalent in that segment of the market. So, yes, I mean, you have one buyer and no guarantee on cash flows for order books and all, to value companies based on incoming orders I do not think that is the right way to look at companies so that is one segment where clearly there seems to be a lot of overexuberance which we can possibly see.

Otherwise also, I think some of these manufacturing, I mean, electronic manufacturing what they call, I think there again the opportunity seems to be very good, but valuations again have gone ahead of the curve. My sense is there should be some correction or some consolidation which should happen. So, yes, I think you will have to go stock specific or sector specific to come to a conclusion but you do not find opportunities to buy let us put it the other way.