Sameer Kaul, MD & CEO of TrustPlutus, believes our market will continue with its time correction till the situation on the ground turns for the better. In an interview with MintGenie, he said investors should go for a staggered investment in equities over the next two quarters and position the portfolio to take full advantage of the eventual first leg-up of the market recovery which is usually the strongest and the swiftest.
Why are domestic markets underperforming? What is your medium-term outlook for the market?
The market has closed in the red for three months on the trot commencing in December’22. The current month too seems to be no different. We are now down nearly 10 percent from the November’22 peak.
When banks, which are the fulcrum of the financial system in any economy, face survival issues, the equity markets get the jitters.
Recent worries around the financial stability of two banks in the US and one in Europe have caused the current bout of uncertainty.
The Q3FY23 results season has been a non-event and we have not seen any EPS (earnings per share) upgrades.
More importantly, the markets have been sideways for the past year and a half and this is causing anxiety among investors.
The bigger risk to the market remains decreased inflows over the coming months given fatigue around flat returns from equities for some time now.
Thus, over the medium term, we expect our market to continue with its time correction till the situation on the ground turns for the better.
The Silicon Valley collapse has spooked investors. Do you see a more profound crisis in the global banking space? Will there be a contagion effect on the Indian banks too?
The collapse of SVB in the US, the takeover of Credit Suisse by UBS in Switzerland, and the drastic cuts in the banking stocks and indices globally do indicate that banks in the US and Europe are affected by the steep rise in interest rates during the last 12-15 months and also that investor sentiment is extremely fragile with regards to the stability of the banking system.
Regulators in these regions have stepped in providing liquidity support to banks so as to limit the contagion effect on the sector.
With regards to India, banks have provisioned for NPAs over the last three-to-five years and most corporate balance sheets are also deleveraged. As a result, the banking sector in India seems to be in quite a healthy position.
While there may be a sentimental impact on Indian banking stocks if the crisis deepens, we do not foresee any issue with the health of the banks per see.
Indian economy is expected to remain on a solid footing, but the prospects of El Nino have instilled fresh concerns. What are your views?
Prospects of a normal monsoon remain low at 10 percent during an El Nino year. Less than 50 percent of India’s agricultural land is presently covered under irrigation. Thus, clearly, El Nino is not a welcome prospect for Indian agriculture.
Major dependence on rainfall makes agriculture in unirrigated areas a high-risk profession and impedes the introduction of modern cultivation mechanisms.
A deficient South-West monsoon could impact the upcoming Kharif crop production resulting in higher prices. That said, over the years we have seen better credit penetration to the agri sector through formal lending channels.
Increasingly, rural India is diversifying into non-agri-based occupations. There is also the possibility of increased MSP (minimum support price) support in difficult years.
Another positive is the adequate reservoir levels and expectation of increased government support before elections which could cushion the impact of El Nino on the agriculture sector in India this year.
Where can one make money in this market? What are the sectors one should bet on?
Starting from the top, the benchmark index has been flat for the past year and a half. Thus, money-making opportunities are few and far between. The overall demand/volume growth in the economy is steadily weakening over the past few quarters.
The forward prognosis too is not very bright as seen in the steady de-rating of India’s GDP growth estimates over the past few months by various economic think tanks.
The one trade investors could hop on is the margin recovery trade. Input costs have been downhill for the past few months. Most management commentaries post Q3FY23 results have talked about minimal high-cost inventory left to be consumed in the current quarter. So, FY24 could well turn out to be the year of improvement in profitability across industries.
Some of the cyclical industries like tyres, cement, auto, etc., have already seen margin improvements in the quarter gone by and given the continuing slide in input costs like metals, crude, pet coke and freight, the bottom-line growth could shine brighter than the top-line growth.
How should retail investors trade in this market? How can they minimise losses and maximise profits?
Given that calendar year 2023 (CY'23) global GDP growth estimates are at multi-year lows, we could see a better CY’24 given the low base. Once a retail investor's asset allocation has been determined, the next step is deployment.
Given the current neutral phase in the market, we suggest a staggered investment in equities over the next two quarters and position the portfolio to take full advantage of the eventual first leg-up of the market recovery which is usually the strongest and the swiftest.
Irrespective of the phase the market is in, the portfolio needs regular maintenance/oiling. That is best done by letting the winners in the portfolio ride and easing out the losers. This is the simple and optimal path to minimise losses and maximise profits. Thus, the retail investor will be best served if he “plucks out the weeds and waters the roses in his portfolio”.
Bond yields are looking attractive at this time when the equity market is highly volatile. Should we trim out exposure to the equities and lean more towards bonds?
We suggest that investors stick to and invest according to their asset allocation. Bond yields are attractive and investors can invest in fixed-income instruments such as target maturity funds to lock in the prevailing high yields.
However, when equity markets correct, they provide more attractive entry points for investors in terms of valuation. Also, frequently switching between equities and fixed-income may have tax implications for investors as well.
Thus, investors are better off investing in both equities and fixed-income in line with their asset allocation and risk tolerance.
Disclaimer: The views and recommendations given in this interview are those of the expert. These do not represent the views of MintGenie.