{"id":170741,"date":"2023-02-09T05:37:34","date_gmt":"2023-02-09T05:37:34","guid":{"rendered":"https:\/\/precoinnews.com\/?p=170741"},"modified":"2023-02-09T05:37:34","modified_gmt":"2023-02-09T05:37:34","slug":"premium-valuations-a-big-challenge-for-markets","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/business\/premium-valuations-a-big-challenge-for-markets\/","title":{"rendered":"‘Premium valuations a big challenge for markets’"},"content":{"rendered":"
‘The reason being we cannot let premiums go beyond a certain point.’<\/strong><\/p>\n Equity valuations are unlikely to expand further unless there are surprises on the earnings front or developed economies do much better than expected, says Taher Badshah<\/strong> of Invesco MF<\/p>\n In conversation with Abhishek Kumar<\/strong>\/Business Standard<\/em>, Badshah shares that the room for MFs’ outperformance is limited in 2023 due to a predictable earnings environment.<\/p>\n In 2022, we saw companies report strong earnings growth. Do you see that continuing?<\/strong><\/p>\n While 2022 was more about top-line (revenue<\/em>) growth, 2023 could be better from a bottom-line (profit<\/em>) perspective.<\/p>\n The revenue growth was strong in 2022 due to a lower base, but profits didn’t go up as much due to higher costs.<\/p>\n Since a low base effect is not there in 2023, revenues might grow at a modest pace but profits may surge due to cooling commodity prices.<\/p>\n How much of a drag can India’s relatively higher valuations be on 2023 equity performance?<\/strong><\/p>\n In 2022, domestic equity returns were muted, but we still did better than most other markets.<\/p>\n Hence, India’s valuations are lower compared with 2022, but the premium over the rest of the world has expanded (as they went through corrections).<\/p>\n Historically, India has been trading at a 10-20 per cent premium to developed markets and 30-50 per cent to other emerging markets.<\/p>\n These ratios have now gone up to around 35 per cent and 80 per cent, respectively.<\/p>\n This can emerge as a challenge for the Indian market because we cannot let premiums go beyond a certain point, even if the economy does relatively better than others.<\/p>\n How can valuations improve, considering robust domestic flows?<\/strong><\/p>\n Premiums seem to be stabilising because India does not seem to be in a position to deliver any major earnings surprise.<\/p>\n Only faster-than-expected economic growth can propel valuations further.<\/p>\n Overall, we see less action in the equity market, considering high valuations and low prospect of earnings surprises, which was a common affair in the post-pandemic period.<\/p>\n However, India might benefit from positive developments on a global level, with either the US and Europe seeing better economic outcomes than expected or the Russia-Ukraine crisis coming to an end.<\/p>\n As an active fund manager, do you find the predictable earnings scenario challenging?<\/strong><\/p>\n Certainly. In a situation of predictability, the pockets of alpha generation shrink.<\/p>\n You don’t get enough room to forecast and position your portfolios for outperformance.<\/p>\n The scope was higher in the post-Covid phase due to uncertainties all around and markets not being able to fully assess the economic situation.<\/p>\n Cut to 2023, the economy is normalised and fewer quarters can throw a surprise.<\/p>\n Will global slowdown benefit Indian companies by way of cooling commodity prices?<\/strong><\/p>\n There are two ways to look at it. A slowdown in the US can cool demand for commodities but that can be offset by the opening up of China.<\/p>\n Last year, there was almost nil incremental demand for oil from China due to the Covid situation.<\/p>\n Also, the supply of commodities hasn’t been very strong and incremental growth seems limited.<\/p>\n This is because investments in the production of key commodities like oil and gas have not happened in a big way for some years due to environmental, social, and governance considerations.<\/p>\n What’s your strategy for managing funds in 2023?<\/strong><\/p>\n At present, there seems to be consensus in the market that banking and financials will continue to do well.<\/p>\n It looks like banks still have the momentum to go up further.<\/p>\n Credit growth has remained strong and their balance sheets are in very good shape.<\/p>\n There’s also a possibility of recovery in rural demand.<\/p>\n There are signs, but we still do not have any conclusive reasons.<\/p>\n Sectors like agriculture, cement, and automotive can also benefit from softening commodity prices.<\/p>\n