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Market not detached from fundamentals, it’ll claw back to reality: Union AMC

‘Our fair value estimate was for a Nifty fall by less than 10%, but the market fell over 20% to make it extremely attractive’

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Last Updated: Jun 01, 2020, 04.22 PM IST
Vinay Pharia Union AMC
We have seen valuations correct across the entire spectrum of the market -- be it largecaps, midcaps or smallcaps.
Market’s fair value growth in next 5 years will be higher than nominal GDP growth rate, says Vinay Paharia, CIO-Equity.

What are you making of the widening rift between macro fundamentals and the market in the way stocks have rallied so sharply delinked from the real economy? What are your observations on this massive rally in last 10 days?
Our assessment is that the market has been extremely volatile simply because the situation has been unprecedented with regard to the impact of the virus on the economy. We have never seen such a situation in almost a century now. So markets have been trying to adjust to this new reality and, hence, sometimes they have overshot and sometimes undershot, trying to rapidly factor in a lot of incoming data. To an onlooker, it would look like a lot of speculation happening and the market may look irrational. But remember, the market is just trying to digest all of the incoming data and estimate the future value of individual companies. That is why the response has been volatile. I would not think markets are completely detached from fundamentals. They are always attached, only that it takes some time to claw back towards fundamentals.

How are you looking at the valuations of the beaten-down sections of the market -- say metals, autos and financials -- versus the prospects that lie four to six quarters hence, given the way demand has collapsed and there are concerns over rising NPAs going forward? These are the three biggest, most broken sectors in the market. Are you finding value or it is still a no go zone for you?
The way we look at it is not just these three sectors. We look at everything in the market based on our proprietary fair value approach, which looks at all the future earnings forecasts that we get and then we look at what should be the value of those earnings for cash flow. It is just like the field. If you are buying a farm and if you have looked at next 50 years, 100 years potential yield, you see a locust attack in the first year and everything is destroyed. What will you do with the valuation of that farm? It would not dramatically change compared with what it was before that locust attack. Same is the case with many of these troubled sectors. You need to look at what will happen beyond first few quarters, or maybe, next one or two years. That is the basis for us to look at not just these sectors but individual companies, and in fact, the entire market. Coming to your question, there are pockets of opportunities in these sectors, and in many other sectors as well. In fact in the entire market, we have seen our fair value estimates for Nifty fall by less than 10 per cent, but the market has fallen more than 20 per cent to make it extremely attractive from a valuation point of view.

If you could share with us the flavour of your framework, your portfolios, and what is the earnings profile looking like right now even if one takes into account this one as an outlier year.
While I cannot talk too much about the future, because of compliance reasons, but I can tell you that the underlying potential, fair value growth over the next five years is likely to be slightly higher than the nominal GDP growth rate. So yes, growth is likely to get impacted this year. It does not require a rocket scientist to figure out. What needs to be understood is that the fair value growth over the next five years, including this worst period, is going to be higher than the nominal GDP growth rate. On top of that, we are trading at a meaningful discount to the current fair value of the market. Hence, we have been reasonably optimistic about equities.

How are you actually addressing the broader market: do you see valuations attractive or do you think business models will remain challenged in the new environment over there? What kind of exposure do you have in your overall portfolio to the broader market?
We have seen valuations correct across the entire spectrum of the market -- be it largecaps, midcaps or smallcaps. As for the overall positioning of the fund, we are broadly neutral across largecaps, midcaps and smallcaps. There are bottom-up opportunities across different segments of the market. We are going completely bottom-up and the sectors where we see a lot of opportunities are of course telecom, where the complete macro environment is changing, pharma and healthcare and IT. These are the sectors we have been overweight on. We have been underweight on consumer discretionary and financials. So, while we are underweight, there are lot of bottom-up opportunities in these sectors as well. So that is the positioning of the portfolios.
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