Markets have been at record high levels and Ajit Banerjee, CIO of Shriram Life Insurance Company, believes that India at this point in time is quite favourably placed as compared to many developed and emerging economies of the world.
In an interview with MintGenie, Banerjee noted that as the market appears to be in the bull run phase which is driven by momentum, several stocks which aren’t fundamentally very strong also tend to rise. Hence, investors need to be cautious in picking stocks that have a higher risk to reward ratio, suggested the expert.
Edited Excerpts:
How do you see the Indian markets performing for the remainder of the year?
Indian markets performing so well in 2023 is a combined effect of various factors. India at this point in time is placed quite favourably as compared to many of the developed and emerging economies of the world. The factors which are standing out in favour of India are as follows:
· Fall in energy and commodity prices
· Lower inflation levels
· Lower current account deficit
· Stable currency
· Some reversal in capital flows as FIIs turn buyers from being sellers for the most part of 2022
· Government's continued efforts in bolstering investor confidence, maintaining policy continuity, structural reforms, etc.
Amidst all the recessionary trends coupled with high inflation across the world, India’s macroeconomic stability has shown tremendous resilience. For the residual part of FY24, the present valuation levels seem justified as it's supported by earnings growth. The pains of inflation inflicted partly by high-cost energy imports, supply-side disruptions, and delays in shipping are largely behind us which augurs well for some tempering on interest costs as well as reduced working capital cycles for Indian corporates.
There would be some bouts of interim volatility in the market, and occasional signals of fatigue which always happens when the market climbs high. Periodic profit booking will also continue. However, unless there are strong headwinds in the form of a very bad monsoon leading to eventual high food inflation compelling RBI to again hike rates or any geo-political crisis of large magnitude which will impact India significantly, the earnings are largely expected to remain strong, more so on the domestic faced corporates.
What strategy should one use this year?
The strategy to be adopted depends predominantly on the investment objective, investment horizon, and risk appetite of the investor. If the investment horizon is long and the long-term growth prospect of the sector and the company looks strong accompanied by an attractive valuation, then the investor can still invest even if there are some present global headwinds being faced. Or otherwise one may choose to invest only in domestic market-facing corporates. Hence, the risk-reward needs to be measured appropriately for all the underlying circumstances and a decision needs to be taken based on the strategy.
Which sectors, according to you, will outperform this year and why?
Domestic facing sectors hold more promise than global ones currently given the strong growth in India and the fact that the battle on inflation is largely behind us. The capex cycle has also begun, initially it was led by central government and now state governments are also joining the game and corporates are also following suit. The measures taken by the government like Income Tax incentive, followed by PLI schemes, defence offset clause, emphasis on green energy projects and emphasis on establishing India as an alternate destination for China plus strategy has led to strong capex-driven growth to come. With the economy set to grow as the fastest-growing economy in the world for the next few years, the financial sector is also expected to grow at a fast pace and should outperform in the next few years aided by strong balance sheets.
Should low-risk investors move away from equities towards fixed-income assets or gold due to uncertain market conditions?
Equity investments by nature are risky instruments with the potential to generate a higher return over fixed-income assets over a longer period of time. However, there can be interim low to negative returns as well. Hence, low-risk investors who would prefer to receive an assured return and can’t wait for capital appreciation should stay away from equities.
Banks or IT? Which sector would be your pick for this year?
From a long-term investment perspective, both are good picks. However, at this point in time from a short to medium-term view, banks would be preferred as still some pain is left in the IT sector in the short term.
IPOs have been making a comeback, especially in June. Do you see this trend continuing?
Considering the perpetuity of growth that is being witnessed, the relative valuations look quite reasonable and fair. This makes the domestic market a favorable destination for overseas investors. The inflows have already started from these investors with close to $10 billion in this financial year so far. Domestic institutional investors too are seeking opportunities to invest despite markets being at record highs. The differential returns will continue to favor the domestic markets even as tough times exist in other territories. While market fundamentals are yet to change, the liquidity points to bullishness in the markets. Hence, we can expect the trend of more IPOs hitting the market to continue.
Midcaps and smallcap have also performed exceptionally recently. Is there more steam left in the broader markets or do you believe the valuations are now high?
The year 2023 appears to be a base building for the next bull run which has started. The near-term movement is likely to be impacted by the policy rate movements in Western countries, currency movements and the quantum of FII flows. Indian corporate sector earnings have improved at a very strong rate of 15-20 percent which makes the valuations look attractive from a long-term perspective. Further, in view of the strong macro factors prevailing in India, even if there are certain global headwinds blowing, our market will be able to defend itself from a deep correction. Strong domestic flows are also acting as counter forces to prevent the market from any mega downslide. Therefore, superior earnings growth and continuity inflows are the main base of this rally. Till such time these two factors remain intact, we can expect a broader market rally in spite of valuations hovering in the long-term average levels on one-year forward price earning basis.
What do you see the FPI trend like this year?
As of data available till 23rd June 2023, FPIs have totally infused $7.81 billion in both debt and equity markets, out of which, investments in equities amount to $7.35 billion. This is even after offsetting the heavy selling done by FPI in the month of January’23. As of June’23, FPIs have become net buyers in 2023. Among a few reasons behind FPIs continuing to invest money in India is a turnaround in sentiments that global hawkishness is nearing its peak though may not be at the end immediately. With the macro environment stabilizing, we have started seeing global flows chasing returns. Earnings are likely to be healthy led by margin expansion for domestic facing sectors. With earnings likely to grow faster than emerging markets, foreign investors should be interested in our market.
How, according to you, a model portfolio should look in this current market environment?
Unfortunately, there isn’t any one size fit for all types of model portfolios under any market environment. The portfolio needs to be constructed on the basis of the investor's investment objective, risk appetite, investment horizon, age, existing and future financial obligations, etc. All these factors are required to be taken into consideration while constructing the portfolio. The events of a market crash can lead to a mass exit from equities by some investors and on the contrary can be a very big investment opportunity for many. Some commonalities can exist in the methodology of stock selection, sector selection, or age bucket-wise broad asset allocation criteria but not otherwise.
One piece of advice for new investors.
As the market appears to be in the bull run phase which is driven by momentum, several stocks which aren’t fundamentally very strong also tend to rise in these conditions. Hence, investors need to be cautious in picking stocks that have a higher risk to reward ratio. Investors should keep a watch if the markets are racing too fast ahead of the fundamentals in the short term.
