Valuations are rich but look acceptable vis-a-vis FY23: Krishna Sanghavi

Even a marginal movement of money away from the US into Asia and maybe Europe can bring disproportionate flows into those economies, says Krishna Sanghavi, CIO, Equities, Mahindra Manulife MF.

How are you analysing the investing landscape right now? In the extreme short term, do you find a case of stretched valuations or are you comfortable with the steepness of the rally?
Valuations are more on the rich side especially when one looks at FY22 . It is only when we look at FY23 that it looks reasonably acceptable. Having said that, there are quite a few pockets which we find attractive. Some look very overpriced but on an average, that is the challenge we have, the market being slightly more expensive. The real answer lies in the expensive part is the liquidity comfort because globally the interest rates have come down so drastically that people are fearing to invest in equity even at a lower rate of return expectations which typically means markets are overvalued for the time being.

How are you analysing the midcap situation? The rally has just started to become broader. Are you hunting for good quality stocks at lower valuations? What do you think of the midcaps?
Clearly midcaps look quite interesting as a space they are coming from the last couple of years of underperformance vis-à-vis largecaps. Midcap companies want easy monetary policy and that is what we have in India where today we are at least talking about even a negative interest rates as far as real rates are concerned.


So, a company which requires money at a lower borrowing cost is in a sweet spot right now and quite a few midcap companies look very interesting from those perspectives where they really benefit. This is over and above the economic recovery which we are factoring in as we know that FY22 is likely to be a great year on recovery because the FY21 base was bad but the midcaps look interesting.

There is a massive flow of liquidity towards emerging markets. How exactly does it happen? There have been really indiscriminate buying. DIIs have been big sellers but does it look structural or are this tourist dollars which are coming into emerging markets?
Well, tourist dollar is a new word. There are essentially two liquidity trends prevalent right now. One trend is globally, more than 50% of market cap is the US and the rest of the world is the remaining sub-50 kind of number. Even a marginal movement of money away from the US into Asia, maybe Europe can mean disproportionate flows into those economies. That is one part which involves a little bit rebalancing away from the US. Perhaps this trend has really started in the current quarter -- Q4 CY20.

The other way round is there’s always this debate between value and growth as a style strategy and somewhere, there is rotation where value companies, value stocks are doing better. The other prospect of liquidity is really the debate between passive flows and active flows and that is where something interesting was observed in the November rally. MSCI. which manages emerging market equity index for investors, basically increased India’s weight by almost 10 percentage point on the base, so something like 8.1 became maybe 8.95 or so. We got a reasonable amount of passive flows which came in because these flows are something which are agnostic to valuation. They really like to replicate the benchmark and that benchmark changed. India which was getting let us say $8.1 out of every $100 last month, now should get $8.95. So, it was a single month of very chunky inflow and that is where we saw one of the best months in November for India.

At the same time, this is more of a regional trend. It is not only India, a lot of other countries in the Asian region specifically have got these flows and that is the reason I tried to connect it along with the global trend of some money being shifting little bit away from US into other geographies.