Fed rate cuts: Manishi Raychaudhuri on factors that will dictate the market in next few months

“If I look at, let us say, the Sensex or Nifty, they are trading at about 24 times one year forward PE, 15% to 20% higher than the long-term averages. In the small and in midcaps, the valuations are much more egregious,” says Manishi Raychaudhuri, Veteran Investor.

What could be really the red flags out there because while the markets have been extremely poised in absorbing that outsized Fed rate cut, but then you have got the US election as well and the swings and the predictions are really all over the place over there. And then, of course, I mean, truth be told, it is an overbloated market. It may very well just fall on its own weight and the reasons may just follow and I am talking about globally, India included in that. What do you think are the big events which are going to really dictate the markets in the next few odd months?
Manishi Raychaudhuri: Geopolitics undoubtedly is one factor that we have to keep an eye out for. There are two major conflicts that are raging across the world. There is US election. Even though the economic policies might not be too different. In the event of a Trump presidency, one might see tax cuts for the corporates and therefore much higher degree of debt being taken up, that itself sort of entails some kind of risk over there. But apart from geopolitics, if I look closer to home, Indian valuations are still not an inspiring confidence, particularly among the foreign investors. If I look at, let us say, the Sensex or Nifty, they are trading at about 24 times one year forward PE, 15% to 20% higher than the long-term averages. In the small and in midcaps, the valuations are much more egregious. We have seen some IPOs that have come up where it is difficult to fundamentally justify the kind of massive subscriptions that they have had. It tells me that there is a lot of money sloshing around, but there is not adequate avenues of investment.
I think this phenomenon of IPOs, the boom in IPOs, and on top of that promoters selling their stake not only the domestic promoters, but also potentially the MNC, multinational company promoters, there are a couple of instances now that is happening.

So, this could increase the equity supply in the market in the near term. Over the longer term, I would not be worried about this because this phenomenon of domestic money coming into the equity market, it is just about started over the last two or three years.

If one looks at the total quantum of investment, domestic savings in India, that number can be a lot higher compared to what we are seeing now even though the monthly SIPs are about $3 to $4 billion in the mutual funds.

So, long term, I would not be seeing the issue of equity supply as a major hurdle. In the short term, it could sort of dampen the valuations, maybe result in some kind of what we call a time correction that actually that would not be a bad outcome. If the valuations moderate as a consequence of a time correction if the other Asian markets move up and we are seeing that in China, greater China right now, then the valuation gap between India and rest of Asia would narrow down and that is a great outcome, that is a great outcome in terms of foreign investors being enthused about investing in India again.
Given that we are talking about so many of these triggers one cannot ignore the kind of traction that we have witnessed within the primary markets. The kind of IPO pipeline as well has been quite robust. Have you made any observations into recent listings that we have seen, what the view is when it comes to valuations being justified, the kind of valuations being attributed to this?
Manishi Raychaudhuri: Well, I would not comment about specific instances, but some of the recent instances, very small companies attracting huge valuations, almost leaving nothing to investors on the table, but being oversubscribed several hundreds of times, that is a bit concerning.

And we have also seen that some of these companies which come into the market, they successfully conduct their IPOs, the stock price declines substantially and that is not really kind of an outcome that enthuses the retail investor. So, it is always beneficial for an IPO-ing company to leave something on the table for the investor. As of now, we are seeing, not exactly seeing that trend, but it is clearly a desirable outcome if it happens.

What are the pockets that you feel are overvalued and the story is over right now? Of course, you are seeing a little bit of an underperformance play out from metals because of the global factors at play, that could very well change. It already has, perhaps. But any pockets where you think the story is done with and you would not want to touch it either because of the growth story or the valuations?
Manishi Raychaudhuri: Well, the most notable ones are possibly in the defence and other related areas in terms of manufacturing, even some of the public sector companies which have appreciated remarkably over the last few months. I would also talk about consumer staples, particularly some of the frontline consumer staples companies.

Many of them are trading close to anywhere between 40 to 60 times PE with potential earnings growth which does not really justify that kind of valuation multiples. So, those are the most obvious overvalued pockets. If one looks at the undervalued pockets, at least the sectors which are fundamentally good over the long term, but have underperformed in the near term, the private sector banks would come into mind, even though earnings growth is likely to slow down, I think the underperformance has possibly been a bit overdone there.

So, investing in India right now, one has to be careful, one has to be very selective, one has to look at it through a microscope possibly but there are pockets of significant value availability and it helps that India is a market that has a distribution of sectors, about 8 to 10 important sectors which investors can choose from.