Venkatesh Balasubramaniam, MD & Head of Research, JM Financial , says despite real estate stocks trading above NAV, he favours DLF and REITs, attracted by potential interest rate declines boosting REIT yields. He is also overweight on hotels, citing limited investment and strong demand creating a favorable structural play. Leela Hotels and Chalet Hotels are specifically mentioned as preferred stocks. JM Financial is overweight on hotels, real estate, and REITs – all of which are outside the Nifty.

Is the market running up because of liquidity or somewhere has a bit of optimism kicked in with regards to where the economy is moving?
Venkatesh Balasubramaniam: We believe this is basically running on liquidity. Domestic flows have been very strong. The monthly SIP numbers are still very strong at almost 267 billion per month. Even though mutual funds have roughly 5% of their holdings in cash, every month when you get these holdings, when you get these flows, you need to deploy it, so that is one thing. Secondly, since March onwards, FII inflows have actually turned positive. So, March, April, May, and in June so far, FII flows have been positive. So, definitely this is running on flows.

Fundamentals are not that weak. Fundamentals are okay. The economic outlook is also quite good. But as valuations are not attractive – be it in largecaps, midcaps, or smallcaps – all are trading at one standard deviation or more above the mean. So, it is very tough to make a positive call based on valuations. Fundamentals are okay, outlook is okay, but at this point in time, whatever runup we are seeing is more because of flows.

I was re reading this recent report by you and what really stands out is that you are overweight on real estate, REITs, travel and tourism. Given that the entire Maha Kumbh trend is behind us, one would believe that this sector could see a little bit of softening. What is driving this conviction for you?
Venkatesh Balasubramaniam: We are benchmarked to the Nifty and in the Nifty 50, there is no real estate stock. So, if we like any real estate stock, automatically we go overweight on real estate. Broadly, the real estate sector is not cheap. Most of the stocks are trading almost 15% to 20% above their NAV. Historically, trading bands are 15-20% below NAV. We are very selective when we come to stocks. We like DLF because it is trading on par. We also like the REIT names primarily because as interest rates come down, a lot of these REITs become very attractive. They are all trading at roughly around 7% yield and 10% growth. It is more of an interest rate kind of a play when it comes to REITs.

Real estate, we like from an interest rate perspective, but it is not that we are positive on all real estate stocks, because some of them are expensive and we are aware that over the last couple of quarters and the next couple of quarters also are going to be a little bit on the softer side.

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Coming to hotels, it has got nothing to do with Maha Kumbh. Over the last four to five years, hardly any investments have been done in the hotel sector. So, there is a lot of demand, but the supply is not adequate. We believe this is likely to continue over the next year, year-and-a-half or so. From that perspective, we like hotels as a structural play. Some of the stocks we like are recently listed Leela Hotels. We also like Chalet Hotels here. These are two names which we like. So, we are overweight on hotels, real estate, and REITs. Incidentally, none of them are a part of the Nifty.