Valuations are expensive relative to history, not to the future: Anil Ghelani

Over the past few weeks, three of the top global brokerage fund houses including Nomura, UBS and Morgan Stanley have downgraded Indian markets citing stretched valuations. To understand how really expensive valuations are Money9 spoke with Anil Ghelani, Senior Vice President at DSP Mutual Fund. Here is the edited excerpts of the interview:

What per cent of your portfolio did you convert into cash as the markets were at an all-time high couple of weeks back?

In passive funds which is the index funds & ETFs we don’t have –we are virtually zero cash as bare minimum as possible we maintain cash. On a given day if I have 0.5% cash that is a big deal to have. So, we have not changed our cash levels at all. In our actively managed funds also, structurally speaking, very less amount of cash is held in the portfolio. Because what I feel is that it can be only seen as a structural allocation of your portfolio. Because on the other side, when an investor is taking a call and coming into equity-oriented fund, it is the duty of the fund manager to give him or her the full allocation to equity.

Global funds like Morgan Stanley, UBS, Nomura have raised concerns over stretched valuations of Indian markets. So, what would be the level that will make you more comfortable to deploy more funds?

In a broad way if you look at valuation it is subjective, somebody is looking at B2B or somebody is looking at B2C or various metrics, now in that what we should look at is how the growth is happening. See because structurally from a capital market investor perspective you are always trying to forecast the growth and discount it and buy it in advance of the growth. But structurally if the earning’s also enhanced then PE will at some point of time start looking to become in a better situation or a more comfortable valuation zone.

So like right now if you look at it, fine I mean market has rallied so sharply and there is some kind of a healthy correction in this past couple of days. I mean on the back of that if you look at earning season which has started, then I don’t feel that there is something very much alarming or concerning. Earnings are looking to be positive almost across all sectors.

So if you look at the PE ratio of the valuation metrics, and you try to forecast the growth and incorporate that, then you will feel that okay fine maybe I am in a much more comfortable zone. Hence valuations are expensive relative to what we have seen in history. Valuations in certain sectors can appear reasonable if you look at the forecasted growth which is likely to come in some of those sectors. In some sectors, there is not much growth being seen in profits. So, if you look at the past, valuations might be expensive but if you look at the future on the sector-to-sector basis, they might not be that expensive.

There are a lot of headwinds in the market currently like tightening of monetary policy, rising covid cases in some countries and so on. So, what are the tailwinds that can unlock the next leg up move for the market?

Some of the companies are seeing growth in their top line or revenue growth, that is one of the very big positives. This was exactly the opposite one year back, last year during Diwali time when we were looking at September quarter results of various companies, at that point of time it was exactly the reverse situation. It was the first time when post the crisis you know like all those high-frequency data had started becoming positive. We had seen GST crossing the 1 lakh crore mark, we had seen some of the other movements or growth picking up, IT numbers looking better.

While many of the companies across a few sectors are facing some margin pressure due to rising raw material like crude oil is and some of the commodity prices are high. So they are facing an increase in raw material prices. Some of them is being passed on to consumers, but in many companies, it is not possible to pass it on. So margins are under pressure maybe for some more time. But because the top line is growing healthy, that will probably remain in a comfortable situation.

Supply chain challenges and energy prices are some of the fundamental challenges that the global economy is facing today. How would it impact India Inc. going forward and by when do you see things normalizing on these two sides?

Global supply chain to a great extent will be dependent on various geopolitical issues and global shortage issues of some of this energy. But I feel by and large things are coming back to normalcy in terms of the supply chain. Actually, shortages can be divided into two segments. One is a structural shortage. Like for example semiconductors, and semiconductors are utilized across so many segments, like today auto, today in sector-driven machinery, so IT related, all your equipment.

All of those have huge demand and requirements of semiconductor chips. Now that shortage of semiconductor chips is a structural shortage, and it is going to be difficult to suddenly overnight increase that. Some of the other things are under the operational bottlenecks. Those can be sorted out in due course of time. So we are in a position where the fact is that there is good enough growth coming in, all of these parts will gradually fall in place and should not be much of an impact.

Over the past six months to one year we have seen a flurry of retail investors who have not experienced any selloff in their lives. So, what would your advice be to them and how can we peg this market volatility?

Investors should focus on their asset allocation and then stay the course. They should not look to keep diverting from the broad course of investing. If you feel that it is something going way beyond what your holding capacity is or you don’t want to increase your risk then you should take corrective action. If not then yeah it is prudent to remain invested and keep your course.

What are the particular risk that an investor could be aware of while investing in a passive fund?

Investing into a passive fund is structurally taking some part of the market risk which is a non-diversifiable risk. Certain risks are common risks of the market. So, if the market falls, of course even your passive fund is going to fall because it is part of the asset class. So for investors low cost passively managed funds, can be core allocations, and then for a satellite allocation, they can use various other let’s say actively managed small and mid-cap funds or some thematic funds. Those are tactical calls. You can invest for a certain time period and then exit out of it. And the overall broad-based allocation can continue as a core. So that is how one can look at passive funds and utilize them for investing in your portfolio.