A wait-and-watch approach is needed: Atul Kumar, Head – Equity Funds, Quantum AMC :: Business Line

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A wait-and-watch approach is what Atul Kumar, Head – Equity Funds, Quantum AMC, recommends. With this rally, stocks are not cheap from a long-term view.

Where do valuations stand now?

In the current rally, the index is relatively well-valued. But given the way money is flowing, a further run-up is possible. But there is relatively less value in the market; we are waiting for things to get more interesting in terms of valuations. We have added to utilities of late, where we see some value emerging considering that this was a sector where regulations were unfavourable.

What can send the markets higher from here?

One thing that needs to happen is earnings growth. In the recent quarters, profitability of companies has grown but that’s attributable to margin expansion on lower costs. Profitability has not become better because of demand improvement. The lower cost benefit is not going to repeat. At some point, underlying demand has to come back. The other thing is actual activity on the capex front. While there is optimism, there has not really been any activity on the ground. When capex has to be undertaken, it takes about 18 to 24 months for feasibility studies and funding. It is still early days. So, once those things come in, it could make the market comfortable.

When can smaller companies catch up on growth?

Many smaller companies are dependent on larger companies for the overall funding environment. For example, when large companies face problems, they can stop payments to smaller companies. So, when these factors improve, they may see much higher improvement on earnings. As far as the interest rate goes, there could still be some volatility in the near term with the current account deficit again increasing and the rupee coming under pressure. It was a kind of given that the Reserve Bank was going to follow through and cut rates, but that may be further off.