The global trend for the last five years has been high liquidity and lower oil prices, leading to higher valuations. That’s changing now. And then there is an added worry of a possible trade war after Trump’s tariffs.
The cost of capital will increase and the price-to-equity multiples, if discounted for that, will weigh on valuations, according to Manish Sonthalia, director and chief investment officer at India Zen Fund, and head of equities-portfolio management services at Motilal Oswal Asset Management Co Ltd. “Yet, despite all the PSU problems, the Indian economy is still growing at 7 percent. You got to find out what works, and park yourself in those pockets,” he said on BloombergQuint’s special show Alpha Moguls.
And India’s domestic-centred economy will weather the impact of a trade war, he said. “The rhetoric of a trade war doesn’t keep me awake because we question our assumptions much more conservatively, and thus the portfolios are more resilient.”
The ultimate truth is earnings growth. If it comes back, it will limit pressures on the market. There is a greater conviction in believing that earnings growth will come back, and that will aid market momentum.”Manish Sonthalia
Bullish On Consumption
Bullish on consumption, Sonthalia said premiumisation will drive growth in staples. In the disinflationary environment, volumes led the growth. “Now we can see pricing growth, and that works well in an inflationary environment.”
Not all companies will benefit though. The winners, he said, would be the ones that benefit from the unorganised-to-organised shift. There are a number of opportunities. That’s where the multi-baggers will come from, he said. Retailing and electrical cables have some great investment ideas, he said.
How to find such potential winners? Focus on longevity to create wealth, not necessarily buying price. “It’s better to buy a good business at an expensive price as opposed to a broken business at a fair price. The question to ask is that after falling, will stocks bounce back or not.”
While he is betting on both discretionary and non-discretionary consumption space, Sonthalia advises investors to pick and choose. “Listed entities could by and large do well, and one should try and buy smaller companies which have an immense scope to grow.”
Backs Pharma, IT
He is also positive on pharma and information technology. IT has undergone a cyclical, not a structural, downturn, he said. Barring banking and financial services, all other verticals are doing well. Investors buying mid-cap IT stock at cheaper valuations than market multiples should be comfortable, he said.
Also, price erosion in pharma is coming to an end. “We are approaching the deep-value zone in pharma, and at some point, select names will make money.”
Cautious On PSU Banks
He is cautious on public sector banks battling with bad loans and capital crunch. “PSU banks are beyond me. The dimension of the problem keeps on changing, and the difficulty to predict the scenario two years out make it a difficult pocket to bet on,” he said.
“There will be a time when PSU banks are a screaming buy, but as of now, it seems to be a bottomless pit.”Manish Sonthalia
Sonthalia also advises patience. There will be periods when quality goes through time correction, which is better than losing money, he said. “Stocks don’t just move in tandem with earnings growth. They front-end the earnings growth, then go through a period of consolidation, and then make the next move.”