scorecardresearchExtreme volatility will give the best opportunities to invest in the long

Extreme volatility will give the best opportunities to invest in the long term, says market expert Madhusudan Kela

Updated: 05 Jan 2023, 08:05 AM IST

According to Madhusudan Kela, Founder, MKVentures, the emphasis must be on sectors with strong earnings visibility in the near and medium term.

Madhusudan Kela, Founder, MKVentures

Madhusudan Kela, Founder, MKVentures

Domestic flows and equity culture in India are still in their infancy and have a lot of room to grow, said Madhusudan Kela, Founder, MKVentures in an interview with MintGenie. He said that banks will be the leaders in earnings growth versus other sectors and this trend is broad-based within the sector.

Edited Excerpts:

Q. How do you view the current state of the Indian market? Do you think it is still overvalued and begets more corrections?

Answer: The market has undergone reasonable time correction and sector-wise rotation, during the last year. Despite this, Indian equities remain one of the best performers globally. While most of the major global indices are significantly down from their 52-week highs, Nifty continues to be within five per cent range from life highs. Headline indices may continue to consolidate in the near term, but a bigger downside is unlikely unless there is a new global shock (unforeseen) or there is some policy-induced correction (like maybe a tax rate increase on equity capital gains). Having said that, we see fewer compelling opportunities today and would advise investors to be more selective in their investment choices at current levels.

Q. What are your thoughts on the Indian market’s trajectory in the next five to 10 years?

Answer: People who have believed in India’s story and acted on it have been able to create immense wealth in the last three decades. During my 30-year career, I've seen the India's GDP grow from $300 billion to more than $3 trillion. Several companies have moved up 100-200x in this period, creating immense wealth for investors. India’s structural growth story remains intact in the medium to long term and has got a further boost from the reforms momentum initiated by the current government. A significant amount of wealth creation will happen in the next decade as well. I am convinced that equity as an asset class should outperform all other forms of asset classes in the next decade.

Q. Domestic investors have emerged as a pillar of strength for the Indian economy in times of intense selling by FII. Do you see this as a sustainable trend?

Answer: Historically, alternative asset classes like gold and real estate have received the bulk of the flows from domestic savings. This trend has only started to reverse in the last few years. Domestic flows and equity culture in India are still in their infancy and have a lot of room to grow. As per estimates, India will be generating around ~ $1 trillion of savings next year, and this is gradually expected to go up further. Domestic investors’ allocation to equities in India is still in a nascent stage and is set to go up structurally from here. However, in the near term, some moderation in domestic flows in place of higher bank fixed deposit rates and other fixed-income options can't be ruled out.

Q. What are your expectations from the market in 2023?

Answer: In 2022, markets have seen reasonable consolidation. We expect global news flow around inflation, interest rates and covid to continue in the first half of 2023 and volatility to remain high. However, this is the time to be prepared and be ready with our work, to build conviction on specific stocks. History suggests that extreme volatility always gives the best opportunities to invest in the long term. There are still enough opportunities available for patient investors. We must not lose sight of the big picture and should use any correction to gradually increase our allocation to stocks.

Q. Banks and PSUs have been doing considerably well. You have been very vocal about banking in general and PSU banks in particular. Do you still see a lot of value in these stocks from current levels?

Answer: Banks in general and PSU banks, in particular, have been one of the best performers. Lucky to have caught on to this trend early. Given the recent outperformance, some moderation in select stocks cannot be ruled out in the near term. However, banks are going to be the leaders in earnings growth versus other sectors and this trend is broad-based within the sector. One should look to use current volatility to get into the right pockets within this space

Q.Not all sectors perform always. Winners keep rotating. Which sector do you expect to fire up the stock market in the coming two years?

Answer: The emphasis must be on sectors with strong earnings visibility in the near and medium term. We are optimistic about India's manufacturing sector and see it as a 5-10-year opportunity. There are a lot of positive developments in this segment and multiple ways to take exposure. We are also selectively looking at opportunities in banks/NBFCs, pharma and infra companies, among other sectors.

Q. Not many research agencies or fund companies are recommending healthcare stocks. What is the possible reason for such a sudden antagonism against the pharma sector?

Answer: Most pharma (healthcare) companies had a very good 2021, and a large section of investors perceive that the performance was largely led by a Covid-related portfolio or short-term tactical business opportunities. Disruption in supply chains and a sharp rise in raw material/energy/logistics costs led to poor 2022 earnings (and also in the last couple of quarters), which has further strengthened this apathy. In my view, there are several good stocks available in the sector that are trading at single/low double-digit multiples in next year’s earnings. Long-term growth potential remains strong for the sector. There is a fantastic investment opportunity for the discerning investor.

Q. Please share your expectations on the budget.

Answer: Given the possibility of a slowdown in global growth over the next year, I expect the government to use this budget to limit any significant impact on the Indian economy. Expect the government to prioritize large-scale infrastructure and capital expenditures to support growth. I see no major tinkering on the taxation front. There is already high taxation in India including STT and capital gains and stock market returns are risky in nature. Markets are not prepared for any negative surprise on this front

Q. What is your advice to new investors in the market?

Answer: Treat equity investing as an investment vehicle for the long term and have realistic return expectations from it. Handling volatility is part of the wealth creation journey. Do detailed bottom-up work, build conviction and use this volatility to build long-term investment positions if you are investing on your own. Preferably though, let professionals handle this for you.

How to determine if the stock market prices are overvalued?
First Published: 05 Jan 2023, 08:05 AM IST