Why going by fair value is right investment strategy in a volatile market


The ongoing pandemic can improve the growth opportunities for both IT and healthcare sectors and the telecom sector can benefit from consolidation and premiumisation trends in the sector, said Vinay Paharia, Chief Investment Officer, Union Mutual Fund to ET.


The market has taken a one-way ride after hitting lows on March 23 with the Nifty gaining 50%. Considering we are still in a pandemic, where do valuations stand?
According to our research, markets follow fair values over the medium to long term. Based on our internal analysis, the fair value of the Nifty 50 Index in FY21 fell by approximately 10% from February 2020 levels, while the markets have also seen a similar correction. At current levels, the markets are trading at a small discount to its current fair value. This value is likely to compound, strongly driven by economic growth and hence we remain optimistic about investing in equities with a medium- to long-term time horizon.



Sectors like pharma, IT have seen sharp runups. Is there value in these spaces for investors to enter now?


We believe that while sectors like healthcare and IT are closer to their current fair value, the growth in the underlying fair values is strong in these sectors over the medium term, making many bottom-up opportunities in these sectors attractive. Also according to us, the ongoing pandemic can improve the growth opportunities for both IT and healthcare sectors, resulting in potential upward shifts in their fair values.

What is happening in telecom? Whie Reliance Industries has moved up sharply, Bharti has lagged behind. What do you make of it?
The telecom sector has consolidated over the last few years and the players are now focusing on monetising their market position by increasing the ARPUs and focusing on profitability. Increased data consumption, higher penetration of broadband and a richer product bouquet are resulting in improved profitability for the sector. We are optimistic about the medium to long-term outlook for the sector and are overweight on telecom in our portfolios.

Banks have seen a sharp correction and it is one sector, where despite the sharp jump in the Nifty, stocks have not yet fully recovered. Your views?
According to us, the ongoing pandemic can have a significant negative impact on the banking and financial services sectors. Banks or NBFCs which have high touch business models, like those of microfinance or vehicle finance companies in particular, can be hurt due to their inability to reach out to their customers for collection in time. Also, lenders to small and medium enterprises may witness higher credit costs as such enterprises have seen a deep impact on their cash flows and business outlook due to the ongoing pandemic. The higher moratorium or restructuring in these sub-segments of the sector points to potentially higher stress in the near future and hence we are underweight in financials.

The growth versus value debate continues. Which camp are you in? Would you be a buyer in value stocks?
According to us, growth companies are those companies whose fair value is growing at a fast pace. Such companies normally trade at a premium to their current fair values, but since the fair value is compounding at a fast pace, the potential return may be good for a medium-term investor.

On the other hand, bargains (popularly referred to as value stocks) are available at a significant discount to the current fair value, though it may be growing at a slower pace than our country’s nominal GDP. In such stocks, an investor needs both fair value growth as well as re-rating by the market to generate good returns over a medium-term.

What are the themes you are betting on? What is your big bet now?
We are overweight on sectors like IT, telecom and healthcare due to the superior risk-reward trade-off offered by stocks in these sectors. According to us, the ongoing pandemic can improve the growth opportunities for both IT and Healthcare sectors. The telecom sector can benefit due to consolidation and premiumisation trends in the sector.

We are underweight on financials, consumer staples and consumer discretionary sectors due to weaker outlooks or richer valuations.

How could the US elections affect global markets? What lies in store for India?

It is very difficult to judge a) the outcome of the election and b) the impact of such an event on the markets. This is corroborated by volatility accompanying the previous election results. Hence we base our investment strategy and portfolio positioning like sector allocation, asset allocation, etc. guided by our fair value approach to the markets and expectations for changes in fair values.





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