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  • retail investors: ETMarkets Smart Talk: Anil Ghelani shares his C-F-E framework to assess equity markets

retail investors: ETMarkets Smart Talk: Anil Ghelani shares his C-F-E framework to assess equity markets

“I assess equity markets with the C-F-E framework, where C stands for corporate earnings, F for flows, and E for event risks,” says Anil Ghelani, Head-Passive Investment and Products, DSP Mutual Fund.

In an interview with ETMarkets, Ghelani said: “Over the past year, we have seen a broad rally across large caps as well as in mid and small-cap stocks. Today with markets reaching new highs, there is a need to remain alert of events both in India and outside” Edited excerpts:

We saw a steady rise in markets last week with Nifty50 climbing 20,000 levels. Do you think the upcoming US Fed meet could play a spoilsport?
Over the past year, we have seen a broad rally across large caps as well as in mid and smallcap stocks. Today with markets reaching new highs, there is a need to remain alert of events both in India and outside.

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I assess equity markets with the C-F-E framework, where C stands for corporate earnings, F for flows, and E for event risks.

Corporate earnings have grown well over the last two years, with Nifty 50 earnings per share rising 30% from 650 to 850. So today with Nifty 50 at around 20000 levels, we are trading at 23.5 times trailing earnings.

While this is lower than 28 times which was seen in Oct 2021, it does indicate a limitation in the potential valuation upside. Looking at flows, last year (CY2022), global investors had taken out ~ $16 billion, but this year till end of August 2023 itself we have already seen net inflow of ~ $16 billion (Rs. 135,287 Crore).

The event risks are slowing global growth and tightening liquidity. So, the event to watch for is that if we see a hard stance from the US Fed meeting later this month, at a time when interest rates are already high, then it can trigger some correction.

This correction could be more in companies trading at very high valuation multiples that are unable to show extraordinary profit growth.Mid & Smallcap indices hit a fresh record high last week – how should one play the theme now? What is pushing the rally?
This year we have seen a broad-based rally, with mid and small caps leading the gains. The large cap Nifty 50 Index is up by ~ 10% on a YTD basis, but the Midcap Index as well as Smallcap Index both are up much more with gains of ~28%.

With such sharp moves in a short time, this theme comes with a certain amount of caution. Within mid and small ca, certain sectors and companies trading at very high valuation multiples can see some correction.

On a broader level, if we compare the valuation of large caps with mid and small caps, currently it is in positive favour of the smaller companies.

The largecap Nifty 50 is trading at 23.5 times the trailing earnings, while mid and small cap indices are trading at 18.5 times trailing earnings.

Within this valuation comfort, we can take exposure to mid and small caps while keeping in mind that they tend to be more volatile than large caps.

If you are a long-term investor, this should not discourage you, as volatility tends to decrease over time.

Over a longer period, this segment has the potential to outperform large caps, making it a very useful part of portfolio allocation for most investors.

Delhi recently concluded the G20 meeting – what is your view and is there any takeaways for India Inc. from the meeting that you have come across?
One of the main highlights of the G20 summit was the New Delhi Declaration which was adopted with 100% consensus. This has assisted in enhancing the image of India’s diplomacy and rising stature.

But besides this, as the host of G20 for the last one year, India has hosted about 200 meetings of different workstreams. These were strategically hosted across 60 different cities with each state and Union Territory hosting atleast one meeting.

This ensured some sort of positive visibility to a broad set of areas, and provided some indirect visibility to the companies there.

There have been multiple bilateral meetings and these would help in fast tracking open issues with those countries, one such example being the meetings with UK which can assist with the India-UK Free Trade Agreement.

While some of these might not have an immediate direct impact on India Inc., certainly over the medium to long term, it would have some indirect positive effect.

How are FIIs looking at India? They have remained net sellers in the cash segment of Indian equity markets so far in September.
Depending on their exact investment mandates, most FPIs look at India from a broad global comparable perspective. Today we believe that three large engines of the global growth – US, Europe and China – are moving slow.

The slowing of these three engines is likely to weigh down on global growth and the outlook for a number of growth markets.

But in this global uncertainty, some FPIs may look to increase their allocation to a country like India where there is economic stability, a stable political regime, and a domestic consumption-driven theme which has seen a structural growth.

This could result in a good opportunity amidst an adverse situation. In the calendar year 2023 till end of August, NSDL data shows that FPIs have come in with a net inflow of ~ $16 billion (Rs. 1.35 Lakh Crore). The last month of August itself saw net inflows of ~ $1.4 billion (Rs. 12,262 Crore).

In the first few trading days of September 2023, we have seen FPIs being net sellers. However, this is on the back of healthy flows prior to that.

So, amidst a positive view, we could see a moderation in the pace of flows or even some net outflows in the next few months.

US Dollar index at 6-month higher – what is fuelling the rise and what is view on rupee and its impact on equity markets?
The US Dollar Index is driven by many factors, including a view on potential interest rate direction and monetary policy action by the US Fed.

A rising Dollar Index is a sign of potentially strong Dollar and weakening of Indian Rupee, as well as other currencies against the Dollar.

We can look at the impact of the rising Dollar Index on equity markets using our “CFE” framework discussed earlier. Now when there is a strong Dollar, with a view to reduce currency losses by weakening the Indian Rupee, we often see FPIs taking out funds from India.

So, this slows down the “F” or Flows part with an expectation of negative flows. FPIs have been net sellers of Indian equities for the month of September 2023 till date, and this expectation of a strengthening Dollar could be one of the reasons.

A strong Dollar Index also causes an adverse impact on the “C” or Corporate Earnings part because a weakening Indian Rupee can create margin pressures on sectors that are dependent on imports such as Metals, Oil and Gas, Capital Goods, and Banking.

In simple terms, we need to remember that the Dollar Index has a sort of “inverse relationship” with Indian equity markets – whenever the Index is growing strong, it is one of the causes of weakness in equity markets.

Which sectors are you betting on or overweight on keeping Budget and National Election in 2024?
If I have to comment on two sectors with a positive outlook, it would be Auto and Healthcare. The Nifty Auto Index has already done well over the past year, but we still see potential with robust ROE business models and strong demand.

Across the board, passenger vehicles, commercial vehicles, and ancillaries are in good shape and these companies are witnessing encouraging demand.

The other sector would be Healthcare, which had remained undervalued for quite some time and has seen a recent pick up. There is a chance that it will continue to see a good recovery.

US generics and pharma appear to have an attractive margin of safety and are placed for better growth prospects. Another interesting area is the IT sector, considering it as a contra bet.

Nifty IT Index has been one of the laggards over the past 12 to 15 months, but I believe that at current levels, valuations are approaching average multiples, and many companies appear financially healthier and relatively cheaper and attractive when compared to global IT peers.

While the Nifty 50 companies have ~74% of revenues coming from India, for the Nifty IT Index companies only ~5% of revenue comes from India and the rest is from markets outside India, such as the US, Europe, and other Asian countries.

So, if a large part of your exposure is linked to domestic risks, with Budget and Election being big domestic events, exposure to Nifty IT Index can help in some manner to diversify away from the domestic market.

You have spoken a lot on NPS schemes – what makes them so attractive?
NPS fulfils a very important requirement of long-term financial planning. Within one common account, you can take exposure to four asset classes viz Equity, Corporate Bonds, Government Bonds and Alternative Assets.

The Assets are managed by professional fund management companies, backed by leading financial conglomerates. NPS is very flexible giving you the choice of fund managers and asset allocation as your age and risk appetite changes, without any tax implications on such shifts.

It is also easy if you change jobs and across employment, whether you are salaried or self-employed or whether you stay in India or plan to move overseas in the future.

There are some unique tax incentives available only for investments into NPS which make it a very attractive tax planning tool besides a useful investment proposition.

I have been associated with the NPS industry from 2009 onwards the first time it had opened up for the private sector and one of the very unique positionings that had evolved from that time is that, world over, it is one of the lowest cost retirement solution for investors.

I believe that over the long term, cost definitely is important for your wealth accumulation so the lower the cost as an investor, it is better for you.

So, on an overall basis, NPS gives you a simple product, a high level of flexibility, well governed by a prudent regulator, and all this at a low cost.

We are seeing a lot of money moving into equity markets via MF route but not a lot of them are investing in the NPS. Do you see this trend changing?
Mutual Funds have seen a much longer history as compared to the National Pension System, and there is much more information and awareness about MFs as compared to NPS.

Another big reason is a type of Life Goals for which each instrument is used. NPS is used for a relatively longer term life goal of retirement! This is not a very exciting life goal.

Hence, NPS is not a natural pick by most of youngsters who would have recently started earning their own money and have a lot of other near-term and tangible aspirational life goals.

So, they would start investing in MFs to help them reach those goals. MFs are used for a variety of near-term smaller life goals such as planning for a global vacation, buying a new EV car, expanding to a bigger clinic, etc. which are all very easy to visualise with faster gratification, and hence more favoured.

However, we are seeing a gradual trend changing as the awareness of the need for financial security in the old age increases. Previously we used to see such themes only in old Bollywood movies, but now that is changing.

I recall some famous Korean web series where this topic of old age financial security was taken up very well. In my personal view, NPS is going to expand manifold in the next decade as income levels rise and awareness improves.

If someone in the age bracket of 30-40 years plans to invest say Rs 10L — what would you advise?
Each individual would have different risk and return objectives, so if I take my personal example of risk profile and return expectations, I will allocate 6.50 Lakhs to Indian equity, 0.5 Lakhs to Global equity, 2 lakhs to debt, 0.5 to Gold and 0.5 to Silver.

This is assuming the Rs. 10 Lakhs is my lumpsum amount to invest today, and I have already kept aside amounts for my cash flow requirements and my long-term monthly SIPs and NPS installments.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

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