Taher Badshah is Director and CIO (Equities) at Invesco Mutual Fund, India. He has had a long career in the Industry that includes leading positions in top financial companies. In this interview he talks about his take on market valuations and his investment approach.
1)Nifty 50 is trading at a P/E multiple of more than 25 and this is the highest for the last one year. P/E multiple of above 22 is considered to be extremely over-bought. What will be your stock picking strategy in the current scenario?
PE multiples have to be seen in the context of the potential growth likely out of the market or out of a particular company and its sustainability over the foreseeable future. Judging a stock only on the basis of the current absolute PE multiple may lead one to wrong investment conclusions. So, while the market looks optically expensive at a PE of ~26x trailing earnings, one needs to bear in mind that we are currently at a trough of the earnings cycle of the economy, and growth can potentially accelerate over the next 2-3 years based on the improving macro environment.
2)In the Invesco India Growth Fund, the exposure towards defensive sectors is currently at an all-time low of the past 5 years, while the exposure to cyclical sectors is at an all-time high. Why this movement from defensive sectors to cyclical sectors while the market is overheated?
In our view, Invesco India Growth fund is well balanced between cyclical and non-cyclical sectors. It is an all-weather diversified fund with a growth-oriented mandate. As per our internal classification, this fund typically has about 75% exposure to growth-oriented stocks and 25% in value stocks, thereby ensuring reasonable risk-adjusted performance over the medium to long term.
3) You have considerably decreased your exposure in IT and Pharma sectors during the last few months. Kindly share your long-term outlook on Pharma as per the current valuation on the sector. Is the IT story fundamentally strong or is it just play on valuations?
Our sector allocation across funds is primarily guided by the mandate of the fund. For eg, while we have reduced our exposure in pharma and IT in funds that are growth oriented, we currently have a modest overweight in the IT sector in our value-focused Contra Fund since we see valuations in the IT sector to be attractive. Our view on Pharma is still neutral to cautious given the headwinds in the sector, challenges around growth and the fact that the sector’s valuations are yet only in line with the market and not cheap despite the recent sharp correction across most of the stocks in the sector.
4) Recently, in Invesco India Growth Fund you have increased the exposure to NBFCs. What is your view on the sector?
With regards to NBFCs, our preference is for companies that have a scalable business model, strong liability franchise and have leadership characteristics in their key business segments. We prefer NBFCs that have undergone reasonable stress-testing especially during the recent twin shocks of demonetization and GST.
5) Which sector /theme do you think is the most interesting at this point of time and why?
We think current macro-factors would be favorable for sectors such as consumer discretionary, financials, oil and gas and select industrials.
6) Do you believe that current government policies would help reclaim the GDP growth rate of 8+?
We agree that the current macro-mix of controlled inflation, reasonable interest rates, stable political climate and favorable commodity prices along with the current momentum on economic reforms along with the tailwind of a global recovery will help the economy to reclaim the 8% growth rate over the next 3-4 quarters.
7) In your portfolio, the allocation to public sector banks looks very low. What is your view on public sector banks?
We believe private sector banks still have a long way to go in terms of market share in the banking sector and those gains will largely come at the cost of the public sector. Only those public sector banks which have a decent core operating profitability and have been able to withstand the impact of the adverse credit cost cycle will likely be investible options at any future date.
8) Most of the fund managers have their investment universe confined to around 250-300 prominent stocks. An uninterrupted cash flow into these stocks through MF and the direct route has pumped up the valuations. Whereas there are hundreds of well managed companies available for investment outside this universe. What is the most practical solution for this issue?
We do not see this as a problem, looking for opportunities beyond the Top 300 companies, provided they satisfy our investment criteria and are in line with the investment mandate. Moreover, India has a considerable number of large businesses which are lined up for listing in the secondary market in the coming years that will likely widen the investment universe.
9) Is the market now waiting for a reason to shed the excess valuation? Or will the earning potential of the companies and lower inflation figures further push things forward?
Markets will largely be guided by the outcome of earnings growth over the next few years. If the economic conditions presently surrounding us turns materially adverse due to any reason, then the markets will likely see a correction in valuations from current levels. On the other hand, should the economy take the desired course of an improving earnings cycle after the very tepid earnings growth of the past 3-4 years, then current valuations will likely sustain or strengthen and provide investors upside at least equal to the earnings growth of the market in the next couple of years.
10) Considering current inflation numbers and floods in North India do you expect further cuts in rates? Also do you foresee rates tightening from here due to another rate hike by U.S?
In my opinion, interest rates appear to have bottomed for now as inflation will likely rise, albeit modestly from current levels of around 2.5%. However, I do not expect our interest rate cycle in the near future to be significantly guided by the outlook on global interest rates considering our priority of kick-starting growth in the economy as soon as possible.