Valuations warrant share market correction, but current rally may have longer legs | INTERVIEW

The year 2020 is drawing to an end now, a year that was full of ups and downs, but more importantly it was a year that taught investors that it is difficult to capture market bottom or market top. But as we end the year at a high, will this make 2021 a troublesome year with premium valuation? Although some correction might be on the cards but with an economy in recovery the correction might be pushed back by the long legs of the current rally, said Vinay Khattar, Head Research, Edelweiss Wealth, in an interview with Kshitij Bhargava of Financial Express Online. Vinay Khattar also shed light on his top investment ideas for 2021. Edited excerpts:

2020 has been a year of many ups and downs, what lessons should investors draw?

One big lesson from 2020 has been that it is very difficult to capture market bottom or market top. When markets are cheap, one should always allocate money in a staggered manner. Consistency and compounding has better returns than an effort to capture absolute top and bottom- which is futile. 2020 has also reiterated that never question the Central Banks’ money printing abilities.

Will premium valuations make 2021 a troubled year for equities?

Valuations are stretched, even after adjusting for lower interest rates, and both in Developed as well as Emerging Markets. Though we have seen an earnings surprise, it is largely owing to cost cutting, and not so much of topline growth. While the consumers have been resilient, with wage cuts, further uptick could be limited. Therefore, some correction from the heated valuations currently is warranted. However if the economic activity picks up in the coming quarters the current rally may have longer legs.

What would be your top investment ideas for 2021?

Among the sectors, we continue to stay positive on automobiles, large private banks, cement, speciality chemicals, IT and metals. Among large caps, our top picks currently are Infosys Limited, ICICI Bank, HDFC Limited, Titan & Pidilite while among the small and mid caps our top picks are Mindtree, Cholamandalam Investment finance , Navin Fluorine, Ashok Leyland and JK Cement.

What’s in store for midcaps and small caps ahead?

With money chasing riskier assets, flows are getting concentrated into the small and midcaps across countries. In the US as well, Russell 2000 has posted the best month ever in terms of absolute as well as percentage gains and is now at record highs. Going forward, we may see a breather in the mid and small caps now however the possibility of revisiting recent lows looks very remote as of now. We believe any corrections in this space should be used as accumulation opportunities as we expect the “risk on” trade to continue.

What would you go for growth or value in the coming year, keeping in mind the current market environment?

I believe growth is the single largest component of value. If there is no growth, then you will end up in a value trap. In any market environment, neither would we chase growth at any price nor would we be buying into stocks which appear cheap but lack growth. The key is to buy stocks which can grow, are available at a reasonable price and stick with them while they compound.

What sectors should be looked at if one is looking to play the PLI theme in the coming year?

Indian manufacturing has bounced back, with Q2 GDP clocking 60bps growth. PMI manufacturing has also remained in expansion zone for four consecutive months now. Mobile phone exports at USD 3 billion are healthy and has a huge untapped potential in value added exports. I believe with PLI in place, coupled with 15% tax rate on new manufacturing units and labor code reforms, India could potentially have a huge foreign direct inflows come in the manufacturing sector. We believe contract manufacturers, textiles, specialty chemicals, pharma and API companies would be a favourable play then.

Edelweiss is hosting The Emerging Ideas Conference which focuses on The Great Reset, could you shed some light on that?

We truly believe that this pandemic has given us a ‘strategic time out’ to fix things for the better as we move from recoiling to resetting and finally to rebuilding. The conference is a unique platform where we explore new ideas and gain a different perspective towards the India story. The theme for the year captures just that, “A Reset” that we have had, and what are policy prescriptions to rebuild effectively. Needless to say, the theme captures the great reset in asset classes and how to maximize returns in the coming years.