“Now, one could argue that post COVID we have seen fairly good growth in the mid and small pockets and which is possibly now normalising, but also the flows have been extremely strong in that particular segment and if you were to look at very long-term returns and valuation charts, we can clearly see that these tend to mean revert and our sense is that mean reversion could even sharper if the flows were at risk at some point in time,” says Christy Mathai, Quantum AMC.
Firstly, help us with your take on the markets going under the correction mode and do you believe that the bottom could be near, we might be hitting the bottom anytime soon or do you believe that the pain can elongate for a little longer time than now?
Christy Mathai: So, our sense of the markets is let us say from the peak of the market, Sensex would have fallen by about 12% near about and if you look at some of the broader indices, the fall could be much higher. So, if you were to look at the very large universe of the stocks which is listed today, almost 70% of them would have fallen by about 30% or more from their peaks. So, it looks like some correction has gone in in that broader markets but if you were to just look at the valuation standpoint, let us say a midcap index versus largecap index one year forward, so that number is still at a premium of 37%.
Now, one could argue that post COVID we have seen fairly good growth in the mid and small pockets and which is possibly now normalising, but also the flows have been extremely strong in that particular segment and if you were to look at very long-term returns and valuation charts, we can clearly see that these tend to mean revert and our sense is that mean reversion could even sharper if the flows were at risk at some point in time.
So, as a house, we think there is some more correction in the offing, possibly this would be much lower in the largecap because if you look at the largecap universe, financials is a very large component of it and they trade at a fairly reasonable valuations but outside of it, especially the small and mid we think there is still more pain to come through especially driven by flows.
Give us a sense that which sectors do you believe will be more vulnerable to the likely correction.
Christy Mathai: So, if you were to broadly look at the larger sectoral breakup. So if you were to look at, for example, the cap goods space, now they have had a terrific run in the past few years driven by some of the order book growth as well as some of that even translating to revenues, but incrementally the valuations have clearly moved up in that particular pocket and possibly now we are looking at some sort of a slowdown in that segment and that could be one place where this correction could be sharper. I know some part of the correction is already happening. The same is the case with some of the industrial, real estate, more capex-linked themes where again, again they have had their fair bit of growth but the valuation bakes in substantial growth even in the future.
So, those would be some of the pockets where we expect some bit of correction and also, if you look at the whole financial aspect especially, the whole links to the capital markets, so typically as the markets correct, there is a broader sense of larger earnings impact also because in the up cycle they tend to do well but when the markets come down, any of these financial themes be it broking houses, some of the AMCs and so on and so forth, so there are impacts that could be very visible on the earnings and if the valuation in those pockets remain higher, there could be some risk in that pocket.
I believe that in the recent fall, you also have been adding to some of those financials names as well as some of the insurance counters are looking attractive to you. But specifically on the insurance side, what is looking interesting and between the private as well as the public players, between the health and the life insurers, where is the place you are finding value?
Christy Mathai: So, in the insurance space, we have b
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