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Equity markets likely to see more volatility: Nippon India MF CIO

Trend of positive market returns, seen since April 2020, unlikely to continue

markets-bull-bear Representational image | Shutterstock

The outlook for India’s equity markets remains upbeat, aided by an expected rebound in India’s economy and corporate earnings gaining momentum, but there is likely to be a lot of volatility along the way, one of the top mutual fund managers said on Tuesday. 

After touching new records last week, equity markets have seen a sell-off in the past two days. On Tuesday, the BSE Sensex plunged 355 points or 0.7 per cent to close at the 52,198.51 level. The NSE Nifty 50 also ended 0.8 per cent or 120 points lower to end the day at 15,632.10 points. On Monday, both the Sensex and Nifty had ended 1 per cent lower.  Investors across markets are worried that COVID-19 cases spiking again in many countries, including UK and the US, could pose a threat to the nascent recovery in the global economy. 

“The short-term correlates a lot to what is happening in the global markets. What is happening today, a lot of it is because the global markets have got shaken by some of the resurgence in COVID-19 cases in US and UK, although the death rates and hospitalisation rates are still quite low,” said Manish Gunwani, the chief investment officer of Nippon India Mutual Fund. It is among the largest fund houses in the country with average assets under management of over Rs 2.40 lakh crore.

Every month since April 2020, market returns have broadly been positive, noted Gunwani, adding that kind of trajectory was unlikely to continue for the next 12-18 months.

“I do expect we will have much more volatility than what we have been having over the last 15 months. The reason is that valuations are now higher than 15 months back across the globe, the liquidity from central banks like US Federal Reserve is now more nuanced today. As the economic growth comes back, the central banks will try to normalise. So, there will be some tightening of liquidity. And this virus thing, there will be ups and downs based on news flow. So, there are many factors by which this kind of volatility will come through,” he said. 

Despite, the expected volatility, Gunwani says several triggers will augur well and focussing on good companies with growing profits will generate healthy returns for investors.

“The domestic economy is headed for a very healthy phase. Globally, vaccinations have helped pull down COVID-19 deaths meaningfully. Slowly, India’s vaccination penetration is going up. Hopefully, in a few months, we should be having this issue behind us. The global economy is surprising on the upside. In India, in nominal terms, we are having interest rates, which are 20-30 year low, home loans are cheap, corporates can borrow at a low cost...From FY21, the corporate earnings cycle also seems to have turned and the outlook for earnings next two years seems promising. Given these positives, we believe markets can deliver steady, healthy returns,” said Gunwani. 

Nippon India Mutual Fund on Tuesday announced the launch of its Flexi cap equity fund, which will invest in a diversified portfolio across large, mid and small-cap companies. The new fund offer will open on July 26 and close on August 9.

SEBI introduced the Flexi cap funds category in November 2020 and it has got strong traction of late with several fund houses launching their NFOs in this category. The ICICI Prudential Flexi cap fund recently garnered a record over Rs 10,000 crore through its NFO.  

“The current market condition creates an opportunity for investment in Flexi cap funds. A Flexi cap strategy can dynamically adapt to varied market scenarios and thus has the potential to outperform across market cycles,” said Gunwani. 

The small-cap and mid-cap stocks have rallied sharply over the last year and Gunwani feels there is further scope to grow. 

“2018 and 2019 were brutal for mid and small caps. Over the last one year, mid and small caps have done well. But, if you see on a three-year basis, essentially,  the performance of large-cap and mid-cap indices is broadly the same and we believe that over the next 1-2 years, the mid-caps still have room to outperform. Given the economy coming back over the next year, midcaps tend to have more operating and financial leverage and a recovering economy leads to better earnings growth,” he said.

Furthermore, many of the new-age companies like chemicals, internet and network related firms that are now going public will also fall in the mid-cap and small-cap space and in the last year, some of these companies have created reasonably good returns for investors, pointed Gunwani. 

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