Equity markets have seen a sharp sell-off this year, as foreign institutional investors continue to sell amid the Russia-Ukraine conflict, rising interest rates and spiralling inflation. The BSE Sensex has tumbled 9.50 per cent in the past month alone. Foreign portfolio investors have pulled out over Rs 1.52 lakh crore in 2022, including Rs 25,216 crore sold so far in May, The Reserve Bank in a surprise move raised the repo rate by 40 basis points this month and with inflation hitting a near 8-year high, the expectation is there will more rate hikes ahead.
In this backdrop, what’s the near-term outlook for stocks, how should investors ride the volatility and which sectors are looking attractive even now?
Sorbh Gupta, equity fund manager at Quantum Asset Management has some of the answers.
Q. Equity markets have been extremely volatile with the geopolitical tensions and interest rates hardening worldwide. There are also commodity cost pressures hurting companies across sectors. How do you see things panning out for stocks this year given the headwinds?
Equity markets are voting machines in the near term (liquidity becomes the driving force) and weighing machines in the long term (business fundamentals are the driving force). Yes, there are challenges in the near term in terms of inflation and higher interest rates and market volatility is reflective of that. However, these are neither new nor insurmountable challenges for well managed Indian businesses. Investors should not have a myopic approach & should anchor their thoughts on longer-term opportunities Indian equities have to offer.
Q. We have seen sustained FII selling since October 2021, while domestic mutual funds have continued to see inflows. With central banks raising interest rates, even in India deposit rates have begun to go up post RBI rate hike, what kind of impact will it have on stocks?
RBI’s surprise move on increasing the repo rate is an acknowledgment of inflation becoming a more important variable in policy decisions than growth. It will not have an immediate bearing on growth or inflation, but it is an indication of things to come. These types of events will come and go multiple times in an investor’s journey to achieving financial goals, and one should not be swayed too much. Investors should stick to their asset allocation plans and use a staggered approach to increase allocation to equities.
Q. As a fund house how are you riding this uncertain and volatile period?
An equity portfolio stress-tested for balance sheet strength (lower leverage) and attractive valuations of investee companies is well suited for this environment. Our portfolio positioning reflects the same.
Q. We are in the midst of the fourth-quarter results season. What's your assessment and the outlook based on earnings you have seen so far?
The Q4FY22 results have started to trickle in and broadly can be considered a mixed bag. The overall demand scenario looks upbeat for most sectors despite inflationary pressure but maintaining the operating margins has been a key challenge due to rise in input costs. The companies are taking multiple steps like increasing product prices, cost control and mix changes to fend off margin pressures. The impact of all the cost pressure mitigation factors will take a few quarters to get reflected in numbers.
Q. From a sectoral perspective, where do you see pockets of opportunities? Which sectors are giving you confidence right now?
Our portfolio is tilted towards cyclicals like banking, consumer discretionary, building material and utilities as India’s economy sees a cyclical uptick in the next couple of years. We believe the current global macro challenges do not derail the domestic cyclical recovery (though it might delay it a little). We are also comfortable with growth prospects in the IT sector in the medium term, but valuations comfort had been eroding due to a sharp run-up. If the current correction in IT continues it will offer a good entry point.
Q. When there is so much uncertainty right now, would you park your money in the large-cap space and not so much in mid and small-caps?
During times of market volatility, investors should prefer funds that invest in stocks with reasonable trading liquidity. Illiquid stocks are likely to see higher volatility during times of volatile markets. Underlying stocks of small and mid-cap funds generally tend to be less liquid. Further larger companies tend to fend off macro challenges much better than smaller ones due to scales and balance sheet strength and provide superior risk-adjusted return.
Q. In the last few years, retail investors have taken to equity and MFs in a big way, via SIPs. What’s your advice to them at the current juncture? How can they ride out the volatility?
Geopolitical challenges, inflation, rising interest rates and premium valuations have made equity look a bit directionless in the near term. However, we have always believed that these are times for investors to stay the course in their investment journey to achieve their financial goals. Equity investors should stagger their allocation to equity over a period and move the asset allocation to the optimum level as defined by their asset allocation plan.