In conversation with Rupesh Patel Senior Fund Manager (Equity Investments) Nippon India Mutual Fund
"The Outlook On India Continues To Remain Positive"
With high levels of inflation expected to persist in the near future along with more potential rate hikes, what is your outlook on the Indian equity markets in the short to medium term?
The markets may remain volatile in the near term on account of global factors like news flow on inflation and Federal Reserve rate hikes. However, our view on Indian equities remains constructive from a medium to long-term perspective. We believe that India is very attractively positioned both from cyclical and structural perspectives. From a cyclical perspective, the corporate balancesheets are deleveraged and asset quality issues for banks are behind us.
In fact, the NPAs of the previous cycle are well-recognised and provided for. Further, capacity utilisations are improving with growth in demand and the government’s continued focus to encourage investments and opportunities arising out of China Plus One augurs well for cyclical recovery. Longer term structural factors supporting arguments for investing in India such as favourable demographics and growing per capita income driving consumption remain very much intact.
What changes have you made in your equity funds in view of the rising interest rates and volatility over the last few months? Currently, are you more skewed towards growth or value stocks?
In our fund, we continually look for opportunities to play across the risk-reward spectrum. Our current positioning is tilted more towards domestic-facing businesses. Our investment approach is more blended and we look to buy businesses where growth is reasonably priced. In general, during last one year we have stayed away from most of the IPOs and expensive new-age technology businesses where we felt growth is significantly back-ended. This has helped the fund navigate the current concerns around rising interest rates well and helped avoid large draw-downs in stock prices.
In your view, how has the Q2FY23 earnings’ season fared? What is your outlook on earnings for the next few quarters?
It has been a very mixed earnings season. Consumer discretionary businesses have generally disappointed on account of higher raw material prices driving the margins down. Banks have delivered strong numbers on the back of improving growth trajectory, better-than-expected margins and below average credit costs. IT service companies reported numbers in line with expectations even though the commentary on demand outlook was more guarded in most of the cases. On an overall basis, earnings’ expectations for FY23 and FY24 haven’t changed much after 2QFY23 earnings. However, there could be some earnings’ cut going ahead owing to slowing global demand impacting the demand for exporters.
Which three major emerging investment themes do you expect to dominate over the next decade?
A decade is really a long time to look at. In this period there will be multiple cycles playing out wherein a particular type of stocks does better than others. However, if we still have to crystal gaze, we believe that, broadly speaking, most of the investment opportunities are likely to fall under the following themes: financial face of the economy, consumption and investments. India is a young country with a favourable demographic profile. As India grows and our per capita income crosses the inflection point, there will be opportunities driven by trends of penetration and premium states.
Improved access to credit, willingness to borrow to meet rising aspirations and willingness and capability to save and invest for a better future are going to be some of the trends that will drive growth for many financial and consumer-oriented businesses. Coming to investments, urbanization, power and power-related infrastructure, railways and defence are some of the segments that are likely to see significant investments going ahead.
How should retail investors navigate the current market volatility with mutual funds?
In the near term the markets are likely to be volatile on account of news flow around inflation, rate hikes, growth slowdown, volatility in currencies and geopolitical developments. Although India has withstood the current bout of volatility very well, that may not be the case going ahead. The markets have delivered a strong performance from the lows of the pandemic and one should not be surprised if returns in the near future remain subdued.
However, the outlook on India continues to remain positive from a medium to longer term perspective. Hence, remaining invested over the long term is likely to be rewarding for investors. In times like these, investors should be well-aware of their risk appetite and remember that equity is a long term but volatile asset class. It is very important to stick to one’s asset allocation plan and not get carried away by the noises around.