What is your market view after the recent rally, is it time now for markets to consolidate or the upside in the market is still left in the near term?
Yes, I think the markets have had a decent run and my sense is that it is not simply because of the reason that there could be a consolidation phase ahead but also the other global risk that we need to keep in mind is the significantly higher US treasury yields.I mean, the risk-free rates in the US have gone back up to the peak levels that we saw back in March. So, when you are able to make a 5% risk-free rate in the US, then that is obviously going to be something that will put equity valuations all over the world into a question mark, so that is one thing that we need to keep in mind.
Also, from the India standpoint, I think the Indian inflation itself was a big negative surprise, the last print that is, and my sense is that the inflation will probably stay at an elevated level at least for the next one quarter or so, so that will also push out the rate cut probabilities that some people were building in for the near term.
So, yes, those are the reasons why I think there could be a breather, there could be a consolidation phase in the market over the next, say, one to two quarters or so. But from a medium to long term perspective, things are looking very attractive, the capex cycle is unfolding, economic growth is clearly standing out in the global context. So, I think on that front, yes, we are clearly very optimistic.
History indicates that if you buy markets at these junctures based on historical parameters, the returns in the long term they get compromised, which is that rarely if you have bought market at 17-18 times one year forward, you made double digit returns. Do you think this time it could be different largely because the India narrative this time is very different, the construct of global equity is very different and what has happened in the past may not happen in the future?
Yes, a good point. The thing is the benchmark for valuations have actually got changed, I would say, over the last five to seven years, not just in India but I would say in the other parts of the world as well.
So, on an absolute basis, yes, the Indian market does look expensive compared to its own history over the last, say, 10 years or so. But if you take a look at relative valuations, as relative to other emerging markets, other developed markets, other Asian markets, etc, and yes, India is at a premium but that premium is more or less at the average levels that we have seen over the last decade. So, yes, on an absolute basis, the valuations are looking on a higher side and your point is valid but I think that valuation benchmarks have got changed globally and not just in India and therefore any global possible sort of correction in the markets, I think remains the key risk that we need to watch out for. Wanted to understand, what do you think is driving midcaps forward and I was just looking at your recent note where you think capex in housing is actually driving demand there. Elaborate a little bit about this theme to us.
So, we do like midcaps, small caps from once again a medium to long term perspective and our preference and the reason why we like midcaps is not because of the market capitalisation necessarily that we like small caps or midcaps not that.
I think we like midcap and the small caps for what they represent. I think the midcaps and small caps are truly representing the India story, especially in the context of the capex cycle upturn that we are looking at.
See, if you look at the large cap names, large cap indices like Nifty, etc, you will barely see, I mean, just about 5% of the large cap index weight is in the stocks that are geared towards the property up cycle, the capex up cycle.
But if you look at midcaps and small caps, that number goes up to 20-25%. Also the proportion of domestic oriented stocks is much higher in the midcaps and small caps whereas in the large cap indices, you have several large commodity names and IT names and pharma names, etc, where the outlook is not necessarily as bright.
So, yes, so just to kind of make my point, we like midcaps and small caps because of what they represent and they represent the true India story and those stocks represent the industrial and the capex recovery story as well.