Find good companies that are available at discount, says Mrinal Singh, CEO & CIO of InCred Asset Management. In an interview with Nishant Kumar of MintGenie, Singh said he sees value emerging in sectors like engineering goods, forgings, castings, healthcare, utilities, auto and auto ancillary, and financials.
Edited excerpts:
Have we reached the peak of pessimism? Is the worst over for the market?
I believe it is important to understand that equity markets are cyclical in nature and at any given point in time, are influenced by a host of elements so we should avoid a constrained approach to assessing opportunities in the stock market and not only focus only on the most recent factors but the long-term paybacks of it.
However, some of these are transitory in nature while many others can have an enduring impact on sectoral and company health and outlook. When you talk about pessimism and optimism, you primarily end up alluding to sentiment, and herein lies the biggest lesson.
While in the short-term markets can be influenced by sentiment, in the long-term they are driven by fundamentals. Thus, if one is looking to create robust long-term portfolios then instead of trying to assess the market mood or identify the right time to enter the market, one must focus on finding good companies that are available at a discount to their fair value.
How do you see the current market situation? How should investors invest in this volatile market?
In any market situation, investors should invest prudently and not lose sight of their long-term strategy. This means that your strategy and not the market levels or situation should dictate your investment decisions.
In a country like India, which is currently on a strong growth trajectory, investors can find compelling investment opportunities.
However, these opportunities should be assessed from a risk per unit perspective and investors must ensure that the investment fits into their overall asset allocation strategy.
Inflation is at an eight-year high; what would you do with your money and investments?
The rise in Inflation poses some risk to domestic food inflation and core inflation due to a sharp increase in global commodity prices. Having said that, instead of looking at simply the headline number, it is more important to identify the source of inflation.
Generally, inflation is caused either by supply-side constraints or due to accelerated demand. So far, the inflation that we are seeing can be attributed to the former.
The pandemic and geopolitical disruption severely impacted global supply chains leading to an increase in freight rates and a consequent spike in the price of most commodities.
Thus, in the near term, we expect inflation to remain elevated but expect prices to cool off as supply-side constraints dissipate, and the demand environment regulates.
In the backdrop of such an environment, one should look at investments, like equities under the expert’s guidance that can maintain the purchasing power of the portfolio per unit of risk.
What is your view on the economic growth of the country? Do you think rate hikes can derail economic recovery?
Currently, India is well-positioned in relative terms as it reduces its external dependencies and continues to focus on becoming increasingly indigenous. The enhanced capital expenditure shall stimulate growth in the long term.
There are several factors contributing to this robust outlook including strong export demand for Indian products, improving domestic demand, a resumption in the Capex growth cycle, and a long-overdue revival in the housing cycle. Thus, we strongly believe that India stands at the cusp of an exponential growth cycle and offers compelling investment
opportunities for long-term investors who are looking to generate alpha and create wealth. In terms of rate hikes, the recent Reserve Bank of India (RBI) action has surprised the markets and precipitated a sharp depreciation in the rupee against the USD.
However, we believe that this impact is likely to be transitory. The demand environment is strong, and even if there are intermittent breaks, it is likely to remain robust in the medium to long term. From that perspective, calibrated rate hikes, up to a certain point, are unlikely to derail India’s long-term economic growth.
What sectors are you betting on at the current juncture? Are you looking at value stocks or growth stocks?
Being a fundamental research-based asset management company, we believe in evaluating the intrinsic value of the company which is determined based on bottom-up factors which remain relevant irrespective of the changing macros and risks.
If a company has a moat, it has the ability to earn a higher return on invested capital than the cost of equity and grow the business through market share gain or sector growth and continue to increase its intrinsic value in the sector.
Currently, we see value emerging in sectors like engineering goods, forgings, castings, healthcare,
utilities, auto and auto ancillary, and financials (mortgage and corporate lenders). We see value emerging in manufacturing sectors on the back of healthy demands and the strong business outlook for the near to medium term.
There is a shift in manufacturing from China in several sectors such as chemicals and engineering. India continues to benefit from increased market share in the global manufacturing value chain due to supply chain disruption globally.
The auto sector is also coming out of a prolonged period of low growth and is likely to benefit from the changing demand environment. Financials, after having writhed credit quality and witnessed multi-decade low credit growth, have now cleaned their books and are well-positioned to capitalize on the positive demand environment.
How would you rate the March quarter earnings? What sectors will be on your radar in the next earnings season?
The demand outlook within selective sectors remains robust however given a competitive intensity, companies are not able to pass on the cost increases to end consumers, and thus near-term margins might remain under pressure.
We believe that we are at the point of a multi-cycle of corporate earnings recovery, which was low at 1.9 percent of GDP in FY20, and is likely to revert to the long-term average. We would like to watch for trends in consumer, healthcare, auto and auto ancillaries, IT and ITES as well as some of the sub-sectors under Industrials and infrastructure on the back of government spending and export support.
We see an improving outlook for the loan growth system. Improved demand for working capital due to rising inflation, steady growth in retail, and improved activity level can be the key drivers of credit growth in the service sector with that if the private sector capex cycle improves faster than expected, the credit growth can reach a higher level.
Disclaimer: The views and recommendations made above are those of the analyst and not of MintGenie.
