Volatility may continue for next 3-6 months based on inflation outlook: HDFC AMC’s Rahul Baijal

Markets have seen above-average volatility in the past year due to various global issues. According to Rahul Baijal, Senior Fund Manager – Equities, HDFC Asset Management Company Ltd, the focus of the market will remain on levels and duration of higher interest rates and economic slowdown – both global and local in the short run.

Edited Excerpts:

Q. Amidst volatile markets that have now been trending up, valuation concerns are resurfacing. Are you increasing cash levels in your fund?

Answer: While markets have been relatively flat on point to point basis over one year, given the portfolio positioning of the Fund, it has done relatively well compared to markets. The outperformance can be attributed to the investment style which focuses on stocks/ businesses/sectors that are expected to deliver earnings growth over the medium term and are available at reasonable valuations. We don’t take cash calls in the fund and build portfolios with a medium to long term view. We will try to use volatility to our advantage by adding ideas which we like and where valuations also get more attractive.

Q. With investors now appearing to be unfazed by hikes, what are the key triggers for the Indian markets that can take them higher, or puncture the rally?

Answer: With markets now approaching last year’s highs, one could argue that markets seem unfazed – but the fact is that markets have seen above-average volatility in the past year on account of various global issues – higher inflation, Ukraine-Russia war, and the “higher for longer interest rates” narrative.

Markets respond to changes in the outlook on GDP and corporate earnings growth, interest rates and the risks to the same. Over the medium to long term, an optimistic domestic growth outlook in a world where growth is slowing down bodes well for the Indian equity markets. In near term, the focus of the market will remain on levels and duration of higher interest rates and economic slowdown – both global and local.

Q. How do you expect 2023 to play out for equities? 

Answer: Going forward, volatility may continue over the next three to six months based on news flow on inflation and growth outlook. The emerging clarity on improvement in the inflation outlook, war situation in Europe and visibility on rate cuts in 2023, should prove positive for equities, as an asset class. In the long term, we believe that earnings growth will be the key factor that will decide the trajectory of the Indian equity markets- and on that front, India is well placed as one of the best-emerging markets to invest in due to the structural attractiveness of the nominal GDP growth story.

Q. What is the strategy that will be followed for the HDFC Business Cycle Fund?

Answer: The fund is a thematic fund that aims to invest in businesses that are favourably positioned on their business cycle, and avoids firms that are likely to enter / in business downcycles. Apart from understanding the positioning of various macro indicators, the top-down approach for the fund covers an understanding of business-specific indicators that help in picking businesses.

Within business upcycles, we have seen that investors tend to get the benefit of both earnings growth and potential improvement in valuation multiples. The fund will invest across the market cap curve. With the fund taking more active calls based on stages of business cycles, the fund has the potential of higher return and risk profile versus most diversified equity mutual funds, but lower than other thematic and sector category funds that usually have exposure to a single category of business.

Q. What is an ideal portfolio allocation strategy you recommend? Is it a good time to look at diversified equity funds or will a concentrated sector allocation bet be a better option?

Answer: Investors should focus on portfolios whose investment strategy revolves around buying good quality, fundamentally strong businesses which are available at valuations that justify the medium to the long term earnings growth potential of a company. Also, the focus should be on funds that take active positions in a controlled manner and have a strong risk management framework. Diversified equity funds are evergreen and many have done well. Those investors who are looking for more aggressive portfolio positioning with a higher risk appetite can also look at concentrated sector allocation funds.