While many reasons may be attributed for this correction, at the heart of it is extended valuations. Within secular bull markets that span several years and even decades, markets run up ahead of earnings and then need to correct through price and time before resuming their journey upwards.
We need to see a 10-20% correction in large cap valuations and 20-40% in midcap valuations to bring them back to reasonable zone. We have so far seen 5-10% price correction across large caps. Valuation corrections are often a mix of time and price.
Two themes which will continue to dominate markets for next few years are manufacturing and China+1. The first is a domestic imperative while the second is global opportunity that India is well placed to tap.
Ajay manages UTI Flexicap with a growth & quality focus. Unsurprisingly, tech is a favourite – both IT services as well as domestic focused e-commerce platforms.
When looking at growth stocks to own for the long term in a developing market like India, one must refrain from applying PE as the key valuation metric. What makes much better sense is to value a company by the size of the business opportunity it is addressing, the scale of disruption itis catalyzing, and its key strengths and execution capabilities.
Using these metrics will enable you to understand the value of e-commerce platforms, organized retail and other such businesses. Cyclical businesses on the other hand are best evaluated using PE and PB. It is important to know which valuation metric to apply to what kind of business. Often times, 50 PE is cheap for one business while 10 PE is costly for another.
Ajay is underweight industrials on valuation concerns – many cyclical industrials are now trading at valuations higher than quality growth compounders in the consumer space. He would look at adding industrials when they get more reasonably valued.