The 2017 Morningstar Investment Conference was held in Mumbai on October 10-11. During that week, the Sensex ranged from 31,769 to 32,508. At the conference, Nikunj Dalmia, Senior Editor at ET Now, questioned four fund managers on the current state of the market.
Stock markets follow a cycle of boom and bust. There is a good time to buy and a good time to sell. Where would you define that we are in this bull market? Assuming that this is the Modi bull market, it started about 3-3.5 years ago. At what stage of the bull market do we find ourselves in?
Sohini Andani of SBI Mutual Fund
Difficult to say at what stage of the market we are at. Given that the growth is taking much longer to come in vis-à-vis what we all have been expecting and the market continues to run, I think we moved well ahead on that path.
Where are we in terms of your understanding of valuation versus market cycles?
I would say that we've not yet reached the extreme toppish kind of a market level. But I would be concerned with where valuations are. Today, it's more a question mark of how soon you see the growth coming. And I think the wait has been much longer than all of us have been expecting. So, there is no clear picture, because we are trading on an economy side a very different growth path than what it has been. So, the correct answer we will come to know only depending upon how growth pans out going forward.
Chirag Setalvad of HDFC Mutual Fund
Clearly, we are not at a point where there is a lot of value. Valuations have moved up, particularly at the mid-cap side. I think things are a lot more challenging today. The market is certainly looking a little bit toppish. But that toppish comment, I think, should be looked at from a 1 to 2-year timeframe. When you extend that timeframe, when you look at 5 or 10 years, then I think the market still has a long way to go.
If you were to compare the market to a 10-storey building, you are certainly not getting in on the ground floor, or the first floor, or the second floor. But I don't think you are getting in on the eighth or ninth either. You are getting in somewhere more than middle.
Valuations are, from a long-term average perspective, a little bit above average; from a mid-cap perspective, even higher than what 10-year averages and 5-year averages have been. The market is a little bit expensive. One has to be careful. But if you extend your time horizon and you look at 5 years plus, then I think things are still okay.
So, at this juncture if somebody is committing capital to the market when valuations are above the 10-year average, they are above average. Do you think the returns for next 2 or 3 years could be below average?
Absolutely. So, markets are actually quite simple too when you think of it.
Your returns are driven by earnings growth and by valuations changing. When valuations move up, you get earnings growth plus; when valuations move down, you get earnings growth minus. Earnings growth is still a reasonable number in this country. Longer-term you should do 15-18%. But valuations will move down. So, valuations will move down from what is 10- 15% above average to closer to average, which means you may sacrifice in the short-term 1-2% – sorry – in the short-term you may sacrifice 3-4%. But from a longer-term perspective, your sacrifice is only 1-2%. So, instead of making 17-18%, you'll make 15-16%. But in the short-term instead of making 15-16%, you may make 4-5%.
Ajay Garg of Aditya Birla Sun Life Mutual Fund
I, as a fund manager, don't focus on markets; rather I tend to focus on the companies.
Look back 8-10 years, or 2008 when our market first time climbed to the peak in line with the global market peaks. From then till now in CAGR terms, the Nifty would have given 4-4.5% returns, or in dollar terms, a little less than or around 1% returns. But a couple of the funds in India they would have given in excess of 10% return. So, it's always better to focus on stocks or the companies that adapt to the changing environment or the historic leaders. Rather, one should focus on the future leaders rather than the historic leaders and establish a benchmark on P/E levels.
We have always heard people saying looking at the historic P/E levels things look expensive or things look cheap. But I don't think it is a right benchmark. Look at the top global companies - Google, Amazon, Apple - these are the ones who have emerged from nowhere. And these are not brick and mortar companies.
So, you are saying that markets on a historical comparison, on a relative comparison, may look expensive, but the stocks in the portfolio, which you are managing right now, you feel that it's still reasonably priced?
Yes. According to my assessment, we try to buy things which are relatively cheaper than the rest of the market or that have established themselves or that have processes in place to establish themselves as future leaders. Rather than going back and drilling down and how have they done on the stock market, I would rather focus on their profitability and the process part and what kind of investment goes into the research and what are the new areas they are trying to tap.
Neelesh Surana of Mirae Asset Mutual Fund
What is your understanding of valuation versus risk plus return?
One is, I would tend to agree with what Ajay is saying that we should focus more on net asset values (NAVs) rather than the market. Too much of focus on market because – I mean, if you do – we have done excess of NAV returns of, say, median mutual fund in a category for 20-25 years. We have about 10 years of track record. I think most well-managed mutual funds, I am seeing median return is in excess of about 4-5% over the benchmark and the power of compounding works significantly. So, same indices level we have seen how NAVs have fluctuated even in, say, short period of 3, 5 years and longer term, it's much more magnified.
That said, I think the market is reasonable, maybe driven by flows, one can say, midpoint or so. But there are two things to be kept in mind when the perception is that P/E, historic P/E multiple is at 23 times or for midcap is 29. When you look at the P/E multiple of the constituent of, let's say, mid-cap, the same 29 become 16 in F 2019; same 23 becomes 27. So, two things are there. Is below normal – while macros have improved in the India, earnings are yet to revert to normalcy. Many sectors are below 10-year average in terms of their potential earnings. Return on asset on corporate banking is much lower. Infrastructure – many things are missing in terms of trajectory of the economy while the macros have improved.
It's always better to buy a high P/E provided E is compressed, some element of that, that's why it is reasonable. And second is, P/E multiple is also a function of interest rate where we are in the cycle. Today, interest rates have come down by about 200 basis points. So, P/E is a function of that.
That said, plus the flows, I think, it's reasonable. There are enough opportunities to hunt and construct a portfolio. So, if the expectation is reasonable, which is, let's say, around 15% sort of returns, and if the timeframe is more like 3, 5-year, I think markets offer enough opportunities, particularly many of the larger pieces of the industrial sectors are cheap, in fact. Some pockets that can be froth and some pockets can be expensive.
