News
‘The market has already priced in good news’ – 2024 Budget News
By Vivek Kumar M
While the stock market recovered quickly from the 6% drop on June 4, DSP mutual fundManaging Director and CEO of Kalpen Parekh believes that the market has already priced in most of the good news, and even a small piece of negative news can trigger a knee-jerk reaction. He told Vivek Kumar M that valuations are currently ahead of earnings growth.
The market recovered very quickly from the June 4 collapse. How do you see things going forward?
I think things have more or less returned to normal. Markets will now focus on the Budget and there will be some anxiety around it as people will want to see what the new government does. Personally, I feel that prices are ahead of earnings growth.
Over the past five to six years, all corrections have been accepted and markets have risen sharply again. Perhaps investors this decade will feel that every correction is worth buying. Previously, it was the opposite. Markets would not remain elevated in a lasting way.
The only concern to have right now is that most of the good news is in the price. Therefore, any small negative news can create sharp corrections. But as flows constantly chase stocks, these corrections are superficial.
Do you believe current valuations justify earnings growth?
In recent quarters, we have seen earnings growth of 15-20%. This largely resulted from margin expansion as revenue growth was in the single digits. At some point, profit growth may moderate. For this kind of past growth and future moderation in earnings growth, 23x is expensive.
How should investors position themselves in Budget-related stocks?
If the Budget is fiscally disciplined and the focus on investment continues, markets should be satisfied. One of the reasons Indian markets are where they are today is macroeconomic stability, whether it is currency or fiscal deficit.
In investment stocks, although there is a lot of growth, valuations are expensive. We will be cautious in this space when it comes to adding incremental positions at this level.
Markets have been rising steadily over the past four years. In the future, do you see the same trend continuing?
If you look at the last 30 years, the average return has been between 12% and 14%. It is more or less correlated with the earnings growth and ROE of the top 200 companies. However, in the four years after Covid, returns were high because we got attractive pricing on the Covid correction. Therefore, return expectations should be moderate. At the same time, if investors earn more than inflation in the next 5 to 10 years, it will be a good result.
With the arrival of the coalition government to power, there may be a renewed interest in consumption. Do you see related sectors benefiting from this?
The consumer basket is experiencing disruptions. New patterns are emerging. So, you need to be selective. It is important to identify companies that are ready for disruption or that respond to disruption.
This segment was the darling of the market between 2013 and 2021. After that, they became very expensive. Earnings growth was 10-12%, but valuations exceeded 40-50x PE. The biggest concern for the consumer basket is rich valuations and not how consumers behave at the moment. We are relatively underweight in the sector. We find better risk-reward play in the BFSI space, especially in private banks.