Equities continue to be the most attractive asset class from a risk-return trade-off for all investors with a long-term investment horizon, said Sanjay Chawla, Chief Investment Officer – Equity, Baroda BNP Paribas Mutual Fund. In an interview with Mintgenie, Chawla said that the near-term direction of markets is nearly impossible to forecast, however, for a medium-term investor, Indian equities offers a compelling investment opportunity. He is overweight the domestic-oriented sectors such as financials, consumer discretionary, Industrials and Healthcare. Edited Excerpts:
How do you see Indian markets play out over the next six months?
Indian markets have been one of the best-performing markets CYTD. Indian equities have outperformed MSCI emerging market index by 25% over the last year. This is despite a record $30 bn outflow by FIIs. Our market has been remarkably resilient on the back of continued strong domestic investor interest and the relative strength of the Indian economy amidst global volatility. While the developed world faces the highest inflation in the last 40-50 years, Indian inflation through high has been relatively manageable. The Indian rupee has held up relatively well and the country is expected to be one of the fastest growing economies at 7.2 percent in FY23.
Going forward, we expect our economic performance to remain robust. Our high-frequency indicators like GST collections, bank credit growth, etc are showing strong momentum. Coming out of 2 years of the pandemic we expect festive demand to be strong.
We believe the continued strong DII inflows; expectations of Inflation having peaked, and the resilient consumption demand is keeping sentiments positive for the Indian equity markets. However, global concerns like high inflation in developed economies and the continued US FED action to raise rates may pose downside risks and contribute to some volatility in the equity markets in the coming months.
Indian markets have outperformed global peers in August, will this trend continue?
The Indian economy is expected to grow at a higher clip than other major global economies in FY23. The economy is expected to benefit from the government’s ambitious capital expenditure program as well as the resilience of the Indian Consumption sectors. Also, the FII flows have turned positive. We believe India can potentially continue to outperform its global peers.
While the commodity prices including oil seem to have peaked, any adverse development on this side may adversely impact India. The near-term direction of markets is nearly impossible to forecast. However, for a medium-term investor, Indian equities offer a compelling investment opportunity.
Can developments in China destabilise global financial markets again?
China is the world’s second-largest economy and probably the most important cog in the global supply chain. It is also the second largest consumer market after the United States. As such, the global economies, and financial markets, are inextricably linked to China. The recent troubles in China’s real estate sector and Zero COVID policy-related lockdowns have impacted the Chinese market and have also disrupted global supply chains.
I believe we have already seen the impact of these issues on the Chinese market. India, with reasonable growth and inflation dynamics, has in fact started attracting foreign portfolio flows.
What’s the road ahead for foreign and domestic flows into Indian equity markets? Do you see DIIs booking profit once the market recovers more?
Over the last few years, equity flow dynamics for India have changed materially. The Indian Government allowed PFs to invest in equity markets around 2015. This is long-term patient capital. We are now seeing close to ₹7,000-8,000 crore inflow every month, and it will progressively increase going forward. Additionally, thanks to regulatory focus and awareness created by publications like yourself, we are seeing close to ₹12,000 crore per month of SIP inflows from retail investors. Together this has become a bigger and more reliable source of flows for Indian equities than FIIs.
India’s domestic flows have been resilient even as FPI inflows had remained negative for the better part of this year. On a year-to-date basis, FPIs have sold equity worth USD28.5bn while DIIs have bought equities worth USD 30.3bn. Recently, FPIs have turned net buyers with net inflows of USD 5.7bn for the month of August. We see domestic flows continuing to remain strong and hope that the positive turn in FPI flows sustains.
Is the risk-reward favourable to small- and mid-caps?
We believe investors should allocate to mid-caps and small caps based on their risk appetites and investment horizons. Both these categories tend to be more volatile in the short-term than large caps. However, over the long term, the mid and small caps have the potential to outperform, as these companies tend to grow at a faster pace and get re-rated.
Mid and small caps have recovered smartly and outperformed large caps from COVID lows. Also, given a volatile global backdrop, large caps have the potential to offer relative stability. In our flexicap funds, we are overweight large caps.
What did you think of the April-June quarter earnings, compared to what markets expected? Which are your overweight and underweight sectors?
1Q results season was broadly in line. NIFTY earnings saw a marginal cut of 2.7% for FY23E. Profit in 1QFY23 was entirely driven by BFSI, aided by moderation in credit cost. Oil & Gas dragged the aggregates while Consumer, Metals, and Cement have beaten expectations. IT earnings were flat in 1QFY23. Coming to sectors, we are overweight the domestic-oriented sectors such as financials, consumer discretionary, Industrials, and Healthcare.
Note: The sector(s)/stock(s) mentioned do not constitute any recommendation of the same and Baroda BNP Paribas Mutual Fund may or may not have any future position in these sector(s).
Many brokerages have cut GDP forecasts for India. Are falling growth rates the next big worry for Indian equity markets?
Most forecasters have revised GDP growth forecasts lower not just for India but for almost all the other major global economies. However, as mentioned earlier, India is expected to remain among the fastest-growing economies in the world. India faces headwinds from rising interest rates and can get impacted by a general slowdown across the globe. However, on balance prospects of India seem significantly better than the rest of the world.
When do you see the primary markets reviving?
Primary markets are expected to revive only when the volatility in the secondary markets settles down. The poor post-listing performance of some of the large and high-profile IPOs earlier this year has acted as a dampener for investor interest in new listings. Anecdotally, we have also seen a cooling off-of fundraising in the private equity space. The IPO market could make a comeback once the equity rally sustains for some time.
Do you believe equities as an asset class is the best investment theme in the current backdrop or investors should move away from them to bonds and other investments?
We believe that equities continue to be the most attractive asset class from a risk-return trade-off for all investors with a long-term investment horizon. However, short-term volatility in the equity markets is always to be expected and the growth in equity portfolios is never linear.
Having said that, investors should always have a diversified and balanced portfolio across all asset classes that are in line with their investment goals as well as their risk appetite. Investors with a relatively lower risk appetite should seek to invest a larger proportion in debt and other asset classes like gold. Hybrid funds like the aggressive hybrid, balanced advantage and multi-asset funds provide a convenient and tax-efficient option for investors to diversify into lower-risk funds than equity funds.