India’s equity markets have seen bouts of volatility in the last couple of months as the US Federal Reserve started reversing its easy money policy amid high inflation. Foreign institutional investors too pulled out Rs 25,000 crore over November and December from India’s equity markets. But, as we have entered 2022, the BSE Sensex has retested the 60,000 level, although it’s still over 4 per cent lower from its life high.
In an interview with THE WEEK, Hiren Ved, the CEO, director and chief investment officer of Alchemy Capital Management said that while the market could consolidate as investors digest the lowering of Fed liquidity, the bull market is not over. He expects strong corporate earnings, which could drive the next leg of the market rally.
Q. Equity markets have seen a fair bit of volatility over the past month or two. Where do you think markets are headed in 2022?
Bull markets are never about markets going up in a straight line. Bull markets also have phases. Usually, whenever the markets bounce from a very deep correction as it happened in 2020, you have a very sharp rebound and then typically, the Nifty or the narrow indexes may go in some sort of a sideways movement. I think we are entering a phase where the Nifty might consolidate and spend some time here. Individual stocks and sectors could very well be in a bull market.
I believe we are in a transition phase, where the markets are basically digesting the fact that incremental liquidity is not going to be created by the Federal Reserve. They have spoken about three interest rate hikes. My personal feeling is at best there will be one or two rate hikes. But, the Fed has clearly shown its hand now and that risk is out of the way. So, I think, after such a stupendous rise, you usually do see some sort of correction and consolidation. That doesn’t mean the bull market is over.
Q. While, central banks have begun to tighten monetary policies and there are uncertainties with the new strain of COVID19, earnings growth across sectors has been strong. Will the lowering of liquidity weigh on the markets or will continued earnings growth lead to another rally?
Our bullishness in the markets is significantly based on our belief in the earnings growth story. I do believe earnings will rebound very strongly. They have actually rebounded in FY21 and even over 2021-22, earnings are likely to compound at least 25 per cent.
I think people fret about the fact that the markets are too high. If the pre-pandemic Nifty was at 12,000 and if you take a 50 per cent rise, you come to 18,000. The markets are reflecting earnings growth. Earnings have grown about 50 per cent, so the markets are up 45-50 per cent.
Q. Are you looking at particular sectors here? In the last two years, we have seen technology and pharma do really well due to the pandemic. What are your thoughts now?
We have seen technology, specialty chemicals, pharma were the sectors leading the rally. These were also the sectors showing the best earnings growth. I think these sectors are on a secular growth path. So, they will continue to grow earnings.
But, I think, if you were to look two years from today, many economy-oriented sectors will also deliver earnings growth - capital goods, manufacturing, automobiles, cement and metals. The sectors that are well aligned to the economy and which have not done well over the last few years, as the economic cycle picks up, you start to see earnings growth coming in there.
Q. What’s your view on the tech space? We had several IPOs happening this year, and many more are in the pipeline.
Some of these companies are going to make a lot of money in the future because companies are disrupting existing businesses and growing at a much faster rate. Therefore, they will create significant wealth and market cap. But, having said that, the journey is not going to be very smooth. The starting valuations of many of these companies are quite aggressive. Therefore, we are quite likely to see that over the next 12-18 months we will get an opportunity to buy into some of these businesses at a much better valuation.
You have to pick and choose. Many of these businesses will do phenomenally well and create wealth over the next few years. But, right now, because it is a new phenomenon, markets and investors are very excited and they want to bet on these companies irrespective of their valuations. We have seen in the best of the best growth companies, there are several twists and turns before you reach greatness.
What we are doing is, we are studying all these companies, we are understanding these businesses more closely and at the right time and right place, we will invest in them and not just because they are available and listed today. In some, we may have already taken up small investments.
Q. Do you think some of these tech companies, especially in fintech, have the capability to disrupt traditional businesses like banks?
Earlier the banks had the complete value chain in their command. Now, the fintechs are attacking parts of the value chain. Therefore, the markets have steadily de-rated the (banking) sector because investors are not able to dimension what impact fintechs will have on the profitability of some of these lenders. It is an evolving story.
I definitely do believe that the fintechs are likely to take away some part of the value chain of the banks. For example, nobody really cared about UPI (unified payments interface) because it was not profitable. Then suddenly, you had fintechs like Paytm and PhonePe’s of the world getting many many customers on their platform, who are transacting on payments as a service.
The fintechs have got these guys and they have got their mindshare to come to the platform and transact. Once the consumer is so used to the service, then whether you have the ability to monetise that customer base, sell other services or make money off transactions is what is going to be very interesting. If you are able to do that, then these businesses can become very profitable in the future.
Banks in general have underperformed the market. I think there is a story out there. The story is a combination of the fact that in the initial phase of COVID, these guys had to take writedowns, provisions, raise capital and the second part of the story is the fintechs are in the field.
Q. Would you continue to fully invest even markets are volatile?
One lesson of the 2002-2007 bull market was that if you tried to time the market, you probably got sub-optimal results. If your big picture thesis is right, then you are better off riding the journey with the associated bumps, rather than predicting and navigating the bumps and then trying to ride the story.
We are entering the next phase of the bull market, which is likely to be bumpy because we are in this transition phase, where we are moving from a very-very high liquidity environment to a high liquidity environment. Before the baton gets passed over from liquidity to earnings growth, we have lot of these other irritants along the way, like the Omicron variants of COVID, what’s happening in Turkey (economy). But, the next few years are going to be phenomenal because very seldom do you see broadly everything falling into place.
What we are doing is if we find a stock we are bullish on and at a valuation, which we reasonably like, we are going right ahead and investing. Maybe I invest 70-80 per cent and I keep the balance to optimise the timing a little bit.