Fund Manager Talk | Worried about valuations in bull market? Nippon CIO on what to buy

Edited excerpts from an interview on Budget expectations and PSU stocks in a retail-driven bull market.

How are you approaching the market ahead of the Budget? Do you think the bias towards capex, infra, and PSU-related themes will remain intact after July 23?
In our view from a domestic perspective the long term opportunities driven by investment cycle and policy reforms remain positive but are well-captured in near term valuations. Assuming policy continuity at a broad level, we believe these themes will remain focus areas for most investors. However, given the rich valuations in these sectors, investors can also consider alternatives like power utilities, IT sector, large banks, etc.Overall, what are your expectations from this year’s Budget as an investor?
Over the last few years, we have witnessed multiple policy enablers across areas like manufacturing, formalization, taxation, etc which has created a sound platform for future growth. In the upcoming budget we expect continuity in terms of policy measures and fiscal prudence. The post pandemic recovery has been uneven especially on the rural side and the impact of the higher inflation is being witnessed in the overall household spending pattern, hence some policy support in this area can help to boost the overall demand.What can be the best and the worst case scenario for investors in the Budget?
A large part of policy decisions usually happen outside annual budgets and significant progress has been witnessed on that front in the last few years. What matters however is the starting point of valuations when investors are looking at long-term wealth creation. Given the strong market performance, a balanced approach to the portfolio construction is critical to manage events which keep recurring.Would you agree that PSU rail stocks are a momentum play in the short term but pricey to own for the long term?
Given the strong performance, many pockets of the market in sectors allied to Capex/ Infra, are already capturing the near-term upsides. A diversified approach when valuations are rich is the best way to manage risk.

What is the biggest risk that you see for investors for the rest of 2024?
Global geopolitical challenges continue and pose challenges to export growth as well as can increase risk aversion. The recent rise in crude prices on the back of production cuts needs to be monitored closely. While the overall growth construct appears to be constructive the elevated equity market valuations fuelled by strong domestic participation leaves less room to absorb any disappointments.

Which pockets of the market do you think offer enough value even at this stage of the bull market?
Sectors with weak near-term earnings trends but relatively attractive valuations like large banks, IT sector, QSR and utilities appear interesting. Cyclical themes like manufacturing, industrials trade at higher premiums with high growth expectations and low room for disappointment.

How do you read the sustained rally in PSU stocks after the elections? If someone is investing for the next 5 years, does it merit to invest in PSUs?
Significant progress has been made in PSU companies in the last few years which includes banks and manufacturing businesses in large sectors like power, defence and railways. Some segments in this space offer selective opportunities, while some pockets are well priced. Investors would benefit from diversified exposure to well-priced businesses in this space.