What will be the biggest theme for next 10 years? Gautam Duggad answers

One theme that will play out throughout next decade is that of the big becoming bigger and concentration of market share and profit pool in favour of big guys in every sector, says Gautam Duggad, Head Of Research - Institutional Equities, Motilal Oswal Financial Services.

How does earnings upgrades and earnings delivery move in tandem with the market? Where are we on the cycle right now?
Tempting as it may sound, one does want to compare this with the 2003 or 2008 cycle but numbers belie that because 2003-2008 was a very different period we have seen 25% earnings CAGR in that five-year period. Global markets were buoyant, everything was working well, fiscal consolidation was also happening and the government was also spending on investments and consumption was also doing well. That was an ideal period as far as the cycle is concerned.

As far as cycles are concerned, not just in India but in other markets also, one thing which is very important to note is each cycle is different and each cycle brings to fore its own set of winners and losers. During the 2003-2008 period, we used to talk a lot about infra names, construction names and power and all. Those sectors are nowhere to be seen today.

Today we are talking about the beneficiaries of PLI, the consumption theme and the broadening of the financialisation of savings. So as far as cycles are concerned, this cycle will bring its own set of beneficiaries and there will be a set of losers. Clearly, one of the themes that will remain prevalent even throughout the next decade is the big becoming bigger and concentration of market share and profit pool in favour of big guys in every sector which is there. That is a very important and very big theme to play out.

As far as valuations in a cycle are concerned, it is fair to expect that when you start an earnings upcycle, markets tend to be slightly ahead of the reality and in an environment like this, where there is a glut of global liquidity and interest rates are low, not just in global markets but even in India, then the market will try and run ahead of itself. But that is a hazard that you have to contend with in a bull market where earnings upgrades are happening after a long time and where expectations are getting reset.

And to add to that, we have just seen the beginning of vaccination. It is tough to pinpoint a finger and say these are the valuations where I will buy and these are the valuations where I will sell. The point is you have to have a basket of stocks across sectors where the earnings visibility is going to be high and where you think the market is willing to ascribe a slightly higher multiple than what is present currently. That is where one will make bulk of the money in a bull cycle or in an earnings upgrade cycle.

So it involves a combination of earnings upgrade plus rerating. That is why BFSI, consumption, IT, and some of the cyclicals will add spice to the portfolio. One has to think twice before looking at any stock in today’s environment thanks to valuations. Unless and until one is very confident about earnings visibility, paying such high multiples will prevent a good compounding over the next three or five years.