Daily Voice: Real estate stocks unlikely to be good investment picks, says OmniScience's Vikas Gupta

Nifty Realty Index’s price-to-earnings ration is 51. At such high valuations, the real estate stocks are unlikely to be good investments, said Vikas Gupta of OmniScience Capital in an interview to Moneycontrol.

However, according to Gupta, if one is investing in real estate stocks to gain from housing demand, a better way to gain exposure is via investing in housing finance companies. “Housing finance companies are available at a PE of less than 10! We are overweight on housing finance and not keen on real estate,” he said.

He believes the market is likely to break through to all-time-highs pretty soon. “The domestic macros are quite strong and economic growth is likely to surprise on the upside. Similarly, inflation is fully in control and likely to remain reasonable with monsoon being favourable,” said the CEO and Chief Investment Strategist at OmniScience Capital.

Are you super bullish on banking and financial services post RBI move?

We have been overweight on banks, both PSU and private banks and housing finance for quite some time. Post the RBI move, we are optimistic that it will further accelerate credit demand. We see several different drivers for this.

First, is the infrastructure sector in which more projects can become viable in the public-private partnership models. Corporate capex is also likely to increase in a declining interest rate cycle. Also, individuals are likely to spur demand for housing, automobiles and other consumer durables. With all 3 drivers, it is to show strong credit growth in the next several quarters. Valuations wise, the banks and housing finance companies are positioned attractively.

Is it the best time to add real estate stocks to portfolio?

Nifty Realty Index PE is 51. At such high valuations, the real estate stocks are unlikely to be good investments. However, if one is investing in real estate stocks to gain from housing demand, a better way to gain exposure is via investing in housing finance companies. A very large percentage of end use sales in real estate is with a home loan financed purchase. Given this, it can be inferred that home loans will show nearly the same growth as the revenue growth in home builders. But housing finance companies are available at a PE of less than 10! The choice is obvious to us and we are overweight on housing finance and not keen on real estate.

Do you expect defence sector to remain expensive though the sector has high visibility over next 5 years?

Unfortunately, since we are scientific investors, the situation is not that great. We would have loved it if the defence sector was less expensive. But given the large order books bringing visibility of growth over next several years, Mr. Market is willing to pay very high valuations for the defence sector. However, if they disappoint on execution, it is possible that sometime in next few quarters we get a chance to allocate more at lower valuations.

However, the counter to this is the push from the Indian defence forces and the defence ministry for faster execution. If the faster execution happens then in hindsight the valuations will look more reasonable. However, we are already quite overweight on this sector and have tried to rationalize our Defence portfolio in a way to reduce overvalued companies and add unconventional dimensions of Defence such as strategic or critical minerals, cyber security, logistics and supply chain etc. This has made our Defence portfolio quite reasonable in terms of valuations while still maintaining exposure to the sector.

Do you think the market will not easily break the consolidation range though domestic cues are strong?

We think the market is likely to break through to all-time-highs pretty soon. The domestic macros are quite strong and economic growth is likely to surprise on the upside. Similarly, inflation is fully in control and likely to remain reasonable with monsoon being favourable. Also, foreign flows are likely to continue.

Are you least optimistic about US-China trade talks?

Yes, that is an area of concern and things remain to be seen as to how they settle. This is a true uncertainty and it is likely to stabilize at a high tariff level. What is the shape of the deal is not clear. But high tariffs on China compared to rest of the world is likely.

Do you see further weakness in US dollar considering current global economic environment?

Donald Trump favours a weaker USD which supports US exports. He wants to export more and thus is likely to support policies which weaken the USD. Also, if the US-China trade deal, even a temporary one, comes through then the flow of goods is maintained and then inflation is contained even with high tariffs. But if the flow of goods stops completely then the inflation in US will be very high. More likely that the flow of Chinese goods to US continues in the next few quarters with some hiccups and then the Fed will be able to cut rates and this will weaken the USD too.

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