Fund Manager Talk | Sensex @ 81,000: Time to think contrarian, sector rotation likely, says Nimesh Chandan

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?
We prefer to be cautious and think contrarian considering the current levels of the market and the valuations. We believe the government is going to come out with a budget that continues to focus on capex and infrastructure development. Additionally, we expect some stimulus to the rural economy and some tax incentives to the low-income groups. This should be favourable for the consumer sector in the country.

Overall, what are your expectations from this year’s Budget as an investor?
The budget is likely to maintain its fiscal consolidation and borrowing targets, as per the announcement made in the Interim budget in February. We expect continuation on the policy front and the messaging to be consistent with previous budgets. We may see higher allocations towards the rural sector. Also, some schemes or incentives for the low-income or the bottom of the pyramid segments. As an investor, this means continuation of the momentum on the capex cycle in the economy and a boost to the consumer side of the economy. Due to high valuations in certain pockets of the market, we may see some sector rotation by investors in the coming months.
What can be the best and the worst-case scenario for investors in the Budget?
Typically, about a month prior to announcement, markets usually begin to incorporate their expectations from the budget into prices. This time around, continuity appears to be more important than significant alterations. As a result, the budget might not cause a big shift in the market as a whole. Certain announcements can affect certain stocks and sectors.Themes related to government capex, manufacturing, renewables, and domestic consumption have dominated returns in this phase of the bull run. Is it time for investors to shift gears or stick to the well-established and popular path?In many of the themes that have been popular or glamorous in the past two years, the valuations have moved up significantly. Many companies that are part of these themes are trading at all-time high valuations. Whenever the crowd gets excited about a certain theme or a sector, it takes those stocks to an overvaluation zone. At the same time, there is likely to be another area in the market that is ignored because of near-term problems and those stocks become under-priced. Hence this is an opportune time to re-evaluate the holdings and make any changes that are warranted.
In the near term, what are the biggest risks you see for equity investors in India even as the bull run looks teflon-coated?
There could be risks emanating from the slowdown of major economies globally. This can impact external facing sectors in India. Globally, markets are expecting interest rates to start moving down. However, due to any reason (geo-political or otherwise) if inflation rises again, rate cuts may be postponed and there could be pressure on the market valuations. Indian corporates have managed profit margins well however, hereon the growth needs to be driven by revenues. Whenever valuations are high, any earnings downgrade can cause a sharp correction in the stock prices.

Which pockets of the market do you think offer enough value even at this stage of the bull market?
As per our analysis, we see better opportunities in consumer staples, midcap and small cap pharmaceutical companies, banking and financial services and chemicals.

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?
We at Bajaj Finserv AMC, try not to paint all PSU businesses with the same brush. This category has a broad range of businesses and it is difficult to generalize and give one outlook for all of them. We evaluate each company separately on the strength of its business, growth forecast, and intrinsic value. Some PSUs are part of our portfolio as we expect healthy gains in their stock prices.