In Conversation with Taher Badshah
Editor’s note: Markets have been unfazed during the second wave of COVID-19 infections, despite it being much more severe than the first one experienced last year. Many investors are now wondering whether the present market sentiment truly reflects the challenges the second wave has posed to India’s economic growth. To decode this rather mysterious market stoicism, we recently caught up a market veteran Taher Badshah, Director and CIO (equities), Invesco Mutual Fund.
The highlights of our discussion with Taher…
We began by asking him why markets are unmoved by the second wave. He opined that the known nature of the pandemic has offered some comfort to investors and the underlying economic indicators have provided props to the markets so far. Further, the ongoing lockdowns are more decentralized and haven’t affected business activity as much as those necessitated by the first wave.
He believed markets have been taking some comfort from the fact that vaccination offers some defence against the virus and at some point, herd immunity may also kick in. The global experience affirms this view. In developed countries, such as the UK, the US and Israel, when the proportion of the vaccinated population crossed 40%-45%, the daily caseload decelerated substantially.
Market valuations aren’t stretched
When asked about valuations vis-à-vis growth prospects, he offered a crisp response. Negative real interest rates (inflation-adjusted) is an underpinning factor for equities, especially when there are still excess capacities in the system. Thus, valuations adjusted for lower cost of capital don’t look stretched for long term investors.
Markets are driven by realistic expectations
When asked to choose what was the primary driving force for the markets at present—hope, liquidity or complacency, his response was quite measured. He suggested that the impact of inflows of foreign capital on markets has been clearly receding nowadays; so, the market rally hasn’t been driven merely by liquidity. Rather, it stemmed from practical expectations based on the global experiences of economic recovery.
Merely ~9% of India’s population was vaccinated on April 30, 2021. Assuming a scenario wherein 60% of India’s population is vaccinated by October 31, 2021, earnings upgrades led by an economic recovery are possible. This might encourage greater participation and offer more upside potential to equities in general.
Cyclicals may take the lead
Savings might take a back seat post-pandemic as there could be a propensity to spend more than save. He thought the ‘global investment’ theme and ‘value’ theme could gain traction in future. That said, he expects the next earnings upcycle would be led by cyclicals, including financials
Not so surprisingly, his sectoral preferences have been more pro-cyclical.
According to him the following sectors might perform well:
- Infrastructure, especially construction and road infrastructure companies
- Pharma sector, especially the vaccine-related plays beyond COVID-19
Commodities and the recovery
Strong recovery witnessed in the US and China has created a favourable environment for commodity producers. He expects average metal prices in the current decade to be higher than the average metal prices experienced in the previous decade. Executing capacity expansions in the mining sector isn’t easy, considering the tightening of ESG compliance; this will put a quasi-cap on supply.
During the pandemic, many corporate houses have deleveraged their balance sheets and implemented aggressive cost reductions to absorb margin pressures inflicted by rising input and freight costs.
At the same time, he also warned against reading too much into rising commodity prices. Elaborating on this point he suggested that rising commodity prices will become counterproductive if affordability becomes an issue for end-user industries.
Banking on Banks
Since the banking sector is known as the pancreas of an economy, we asked him how he found the Indian financial system placed to tackle the potential COVID-19 related Non-Performing Assets (NPAs). Taher’s response to this was rather encouraging from the economic point of view.
He thought, Indian banks have weathered lots of bad news and developments over the last few years. Corporate defaults from the last cycle were more specific, acute and large-sized. In comparison, the retail stress, if any, will be dispersed just as consumer spending is.
Taher also brought our attention to the CASA (Current-Account-Savings-Account) deposit growth of banks which serves as a cheap source of funds to them. Frontline PSBs (Public Sector Banks) and private sector banks have raised capital during the pandemic. This has been a comforting factor for investors.
Taher opined that market valuations of banks haven’t factored in any (future) credit growth and many of them still trade at a discount to their historical valuations. He remained optimistic about banks coming back strongly in FY23.
The key takeways of our conversation with Taher Badshah are:
- Currently, COVID-19 is a relatively known problem compared to last year, thus the market is less spooked than it was.
- The vaccination drive will improve recovery prospects
- Real interest rates are likely to stay negative—a plus for equities
- Risk-reward ratios favour long term investors at this juncture
- Financials and other cyclical sectors may lead the next upcycle in corporate earnings
Important note (Please read as a disclaimer): None of the mutual fund schemes, if any, discussed in this note are recommendations to buy, hold or redeem. So is the case with sectors that might have been referred to. Views expressed herein overtly or even otherwise are solely those of the guest and under no circumstances should be construed as those of Ventura Securities. The only purpose of this coverage is to create awareness amongst investors. Moreover, assumptions made by the guest are incidental to offering view and are entirely his. Ventura Securities has no view on any of the potential conclusions that could be drawn therefrom. That said, the note isn’t verbatim.
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Please note (Read as a disclaimer): The blog is for information purposes only and anything mentioned herein shouldn’t be construed as financial/investment advice in any form. The only purpose of this coverage is to create awareness amongst investors. Please consult your financial advisor before taking any decision pertaining to your finances. Investing in mutual funds is subject to market risks, please read the scheme information documents carefully before investing.
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