In an interaction with Vinit Sambre Head (Equities), DSP Mutual Fund
"We believe that the banking sector is attractive"
"It is recommended that investors adhere to their asset allocation plan in a disciplined manner, in accordance with their risk profile"
What is your general evaluation of the current market situation given the significant correction experienced over the past few weeks, especially after the SVB fallout?
In light of the current uncertain economic climate characterised by high interest rates and global recessionary risk, we have seen a healthy correction in the Indian markets. Having outperformed global markets in CY22, the valuations had become quite elevated. However, this correction has brought the valuations down to below the 10-year average, which is a positive development. Despite this, given the ongoing macroeconomic conditions, uncertainty is expected to persist, and earnings growth rates for Indian corporations are likely to slow down a bit, keeping the markets in a consolidation phase in the near term. Nevertheless, this presents a chance for long-term investors to accumulate stocks at reasonable valuations, making it an attractive market for them.
How do you manage risk in your funds, and what measures do you take to mitigate potential losses?
Our approach is to minimise the risk of capital erosion by targeting companies that exhibit superior cash flow generation, low leverage and exceptional returns on capital employed (ROCE). In addition to this, we also recognise that there are potential risks stemming from technological disruption, and therefore, it is crucial to evaluate how companies are adapting to these changes and preparing for the future. Moreover, we aim to reduce risk by investing in good businesses at fair valuations, thereby minimising the risk of overpaying.
What are the three sectors that you think appear promising and offer potential for investment in the long term?
We believe that the banking sector is attractive due to its improving performance, including higher credit growth, stable net interest margins, low credit costs, and improving return on assets. Additionally, we believe that the automotive sector is poised for growth as it recovers from a period of slowdown. Although the healthcare sector may face challenges due to rising raw material costs and pricing pressure in the US market, we believe these are temporary and are positive on the sector due to its strong cash flow and reasonable valuations.
How do you anticipate equities to perform over the next six months? What are the major downside risks?
In terms of predicting equity movements, we prefer not to speculate on what the next six months might bring. Nevertheless, it’s important to recognise that there is a potential risk of slowing earnings growth as consumption demand remains sluggish. Furthermore, if the global recessionary trends persist, we could see export-oriented sectors experience a slowdown as well. Additionally, we need to be wary of the deflationary environment that may arise from the recession, which could cause nominal growth to decline, ultimately impacting overall growth. In my opinion, a slower-than-expected growth could lead to further corrections in valuations.
In the current volatile market conditions, what asset allocation strategy would you suggest for investors?
The allocation of assets should be determined based on the investor’s needs and risk tolerance. It is recommended that investors adhere to their asset allocation plan in a disciplined manner, in accordance with their risk profile. Although the current macroeconomic changes are quite significant and may prompt investors to make significant adjustments, in the long run, such changes will not matter much. Therefore, it’s advisable to stick to the core asset allocation strategy.