Equity valuations are ahead of their fundamentals owing to the signs of growth recovery, government spending and healthy demand outlook from rural economy.

Rajesh Cheruvu, Chief Investment Officer at Validus Wealth advises investors to invest in a gradual or staggered manner to increase equity allocation as equity valuations are ahead of their fundamentals owing to the signs of growth recovery, government spending and healthy demand outlook from rural economy, and it is very difficult to call the market peaks and troughs.

Since 2014, domestic institutions or retail investor flows into Indian equities have been going steadily higher. On the other hand, FPI flows have been quite volatile in the past 7 years, he told Moneycontrol’s Sunil Shankar Matkar, in an interview.

Edited Excerpts:-

Q: Do we really need to worry if the Federal Reserve starts tapering of bond purchases sooner than later? Do you expect the sharply rally in US bond yields, this time?

FED tapering is imminent given the nature of economic recovery and inflation worries, however, the debate is on timing and pace of tapering are vital. So far, the indications suggest it could be an event to ponder in 2022-23 for now. As and when that happens, it tends to have more ramifications on emerging market assets than developed markets. The recent rally in US bond yields can be partially attributable to this potential event.

Q: Lot of companies lined up for fund raising via IPOs in the primary market. Do you expect the record fund raising via IPOs in 2021 and is there any possibility of LIC and NSE IPOs this year?

Given the global and local liquidity conditions, we could see large issuances like NSE, LIC of India and a few other tech unicorns that could hit the markets sooner than later.

Q: Also majority of IPOs are getting fully subscribed either in the initial hour of opening or on the first day of opening? What are factors driving such optimism and why retail investors are so much excited about every issue?

It’s primarily driven by the spurt in domestic participation in equity markets, quality of issuances, growth opportunities offered by these names and valuation attractiveness.

Q: Among the IPOs launched so far or getting launched in the coming months, have you spot any wealth creating ideas?

Technology platform-oriented companies could be looked at on a case-to-case basis. They may deliver healthy earnings and stock returns depending upon their execution capability, scalability, and target market opportunity. Traditional valuation metrics could be misleading to gauge their valuations.

Q: FIIs are consistently selling in the Indian equities, but at the same time, the market is not seeing major selling pressure and has largely been moving in a tight range. What does it indicate and who is supporting the market then?

Since 2014 domestic institutions or retail investor flows have been going steadily into Indian equities, FPI flows have quite volatile during the past 7 years. Market rally from 6,500 in 2014 to the current 16,000 is largely driven by domestic flows. Dependence on FPIs has shifted for good now, to Equity MF SIPs seeing a $1 billion per month flow for more than 4 years for now.

Q: Majority of experts consistently say about the risk of third Covid wave. Do you agree and what are other risks that one has to consider before investing in equity now?

Yes, the 3rd, 4th and 5th waves might be real in the times to come in line with the historical and global experience. However, how painful they could be is a question mark. The second wave has caused severe pain to mankind compared to 1st wave, while the impact on the economy and business activity has been lesser. The progressive vaccination and preparedness of government could limit the impact further in successive waves.

Q: The market continued its fresh record high journey in second half of 2021. What are driving factors for the market – is it FOMO, TINA, or plain liquidity?

It’s a combination of all the three and potential economic and earnings recovery and hopes of a long-awaited capital expenditure cycle. Corporate and banks’ balance sheets are in much better shape than any post-crisis situation for Indian companies. The opportunity post pandemic led by China Plus 1, import substitution and PLI programme of GoI are supportive for revival in capex.

Q: Do you think it is the time to be a cautious considering the outperformance of midcap and small caps over large caps? What should investors do now?

Equity valuations are ahead of their fundamentals owing to the signs of growth recovery, government spending and healthy demand outlook from rural economy. This combined with healthy liquidity conditions leads to exuberance in markets and hence, the current rally. It is very difficult to call the market peaks and troughs. Thus, suggest investors to invest in a gradual or staggered manner to increase equity allocation.

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