In the current economic scenario, the sectors and companies that have the lowest earnings risk would likely do well, said Manish Jeloka, Co-head of Products & Solutions, Sanctum Wealth. In an interview with MintGenie, he said investing in efficiently managed strong businesses with healthy balance sheets and decent growth is a sound investment strategy.
Edited excerpts:
Many analysts believe we are in a bear market now. Do you agree with this view? What is your outlook for the market for the medium term?
Technically, Nifty and Sensex haven’t gone into bear market territory because the fall from the peak to the trough is still less than 20 percent.
The fall is contained despite huge selling from FIIs, who are major owners of the index stocks. Taking that into account, there is a high degree of resilience in headline indices.
The high-flying sectors of the previous rally, namely IT and metals, have also now seen significant falls, taking off the excesses built in the last two years.
The broader market indices have seen over 20 percent falls and stocks within them have seen major damage, which can be termed a bear market.
The valuations in some pockets in this section market had reached obscene levels, and it was natural for them to revert to mean given the risk-off environment, lack of follow-through on fundamentals and significant industry headwinds across sectors.
When do you expect the market to start moving forward? What sectors may lead the next phase of the market rally?
The markets may continue to be volatile and range-bound going forward with stock-specific action. As the dust settles on macros, which it should in some time, the focus will shift to earnings and stocks and sectors that are seeing good earnings growth shall perform.
The start of the current fall coincided with the start of relentless FII selling to the tune of $45 billion, which is the highest ever in one selling streak. The reversal of these flows is quite essential for the market to reach its earlier peak.
This reversal will only happen when the world is done adjusting to the new normal of higher rates and slower economic growth. DII buying, on the other hand, should continue to support the markets led by resilient mutual fund flows, a healthy local economy and valuation attractiveness.
In this environment, the sectors and companies that have the lowest earnings risk would likely do well.
There could be winners in sectors like autos and auto ancillary and select consumer discretionary spaces which could benefit from relatively lower raw material impact as well as stable demand going forward.
With double-digit credit growth, financials shall also do well, though there will be a short-term earnings impact due to MTM losses in SLR holdings led by a sharp increase in interest rates.
The combination of sticky inflation and aggressive rate hikes is expected to dent the economic recovery. Economists see the high probability of a recession now. What should be the equity investment strategy in such times?
Historically, economists have been much more wrong than right in forecasting recessions. Most importantly, the recessions have never been consensus and have always come as a surprise. Therefore, one must be careful while reading those forecasts.
That said, a sound investment strategy at all times is to invest in efficiently managed strong businesses with healthy balance sheets and decent growth. The strategy holds even more prominence in tough times like slowdowns and recessions.
These businesses, which are generally leaders in their space, wither downturns extremely well and come out stronger at the other end.
The best part of tough markets is that such businesses become available at better valuations, making market volatility a great time to prepare the portfolio for good times. Investors can systematically invest in a basket of such stocks without worrying too much about recession or slowdown.
Safe haven assets such as gold and real estate are considered safer bets in times of economic uncertainty. Do you think it is time to trim exposure to equities and raise stakes in gold and realty?
If an investor’s goal is to build long-term wealth, equity investments play a very important role and one should stay invested regardless of the short-term blips. One must not tweak the exposures in this portfolio based on market cycles.
For tactical investors, the best time to make the tweak is in the euphoric phase of the markets. With a lot of damage already done, there is not much to gain from tweaking the exposure now.
Having said that, gold looks attractive as an investment from a long-term perspective. Real estate is a bit more complex as an investment. One will need to evaluate each situation.
What sectors will you bet on in this market? What sectors should be avoided? Please explain your views.
The domestic economy is resilient with double-digit credit growth print and various economic parameters now above the pre-covid level of activity, which was not the case a quarter ago.
It's only logical to realign the portfolio more towards the domestic-facing economy. Also, one should take cognizance of manufacturing sector FDI to the tune of $21bn and PLI-led capex should keep the momentum going for the Indian economy.
Tactically, we like financials, auto and auto ancillary and select consumer discretionary names which could be the potential leaders in the next leg of up move in markets post significant de-rating over the last couple of years and improved earnings performance going ahead.
We continue to have a positive view on multiyear themes of manufacturing opportunities, the turnaround in the real estate cycle and formalization of the economy, as these trends generally don’t get shaken up by short-term market corrections.
With high global uncertainty, it's better to avoid global cyclicals, such as commodities.
BSE Metal index hit an all-time high on April 11, 2022, but only after two months, it is near its 52-week low. What has changed for the metal stocks now? Is it time to invest in metal stocks or we should stay away for some more time?
The best time to exit metal stocks is when the earnings growth looks significantly high and valuation multiples look abysmally low. When the metal prices start cracking, the abnormal earnings for these companies tend to evaporate.
Metal prices are now under threat for a few reasons. There is government intervention in exports, war and resulting high energy prices that are hurting demand in Europe, and anticipated demand slowdown due to rising interest rates. Rising interest rates are also a big threat to earnings because of the significantly leveraged balance sheets of these companies.
The post-pandemic supply crunch-led pricing increase is normalizing and investors should wait for these stocks to bottom out and new triggers to surface before making fresh bets.
Disclaimer: The views and recommendations made above are those of the analyst and not of MintGenie.
