In Conversation With,Krishna Sanghavi CIO (Equity) Mahindra Manulife Mutual Fund

"Capital Expansion is Likely to be Simulated"

Krishna Sanghavi
CIO (Equity) Mahindra Manulife Mutual Fund

"Capital Expansion is Likely to be Simulated"

What is your outlook on the equity markets in the short to medium-term? Do you expect the markets to consolidate from here onwards?

The equity markets almost always offer a choice to evaluate outlook on a short to medium-term or medium to long-term basis. The long-term picture connects fundamentals such as economy and corporate earnings while the short-term links liquidity and sentiments. When we look at the long-term we need to be aware of the past – wealth creation in the Indian markets when the country’s economy moved from 14th rank globally in 2006 to 7th rank in 2021. Looking forward, multiple agencies have estimated India to move to the third-largest economy in this decade. We believe the Production Linked Incentive (PLI) scheme and the insistence on self-reliance are likely to stimulate capital expansion.

These will also create jobs and drive consumption growth going ahead. So, the longer term outlook is that as economy grows, corporate earnings rise and equity markets respect and value earnings. On the other hand, there are some headwinds in the short term as market participants have some concerns over implications of monetary policy tightening on global economy and market valuations. India’s GDP has 20 per cent exports and any issues on the global front may impact growth. Let’s not forget the silver lining: Indian economy is likely to grow at 3-3.5 per cent higher than global growth.
 

How has the Q2FY23 earnings’ season fared? Will margin pressures persist for select sectors due to rupee depreciation and high inflation?

Q2FY23 earnings on the whole have been good with both winners and losers. Sector-wise, financials – mainly banks – led the pack with earnings beating consensus estimates and seeing earnings’ upgrade. Global commodity prices have been coming off and that impacted the earnings of commodity-producing companies, but helped the consumers of commodities. Automotive and consumer sectors have started seeing some benefit of commodity price fall, the full impact of which will be visible in the next quarter. Broadly, the domestic economyoriented companies had a good earnings’ season as against the global-oriented companies. Yes, rupee depreciation can cause some companies to lose and some companies to gain.
 

What are the pertinent risks facing equity markets in H2FY23?

We can classify these risks into two categories: economic and investment environment on one hand and investor behaviour on the other. From the perspective of economic and investment environment, the risks clearly are more global such as escalation in geopolitical conflicts, higher inflation attracting sharper rate hikes by the US Federal Reserve and fears of global recession. We expect H2FY23 to broadly witness a peak on the monetary policy tightening front. The fears about global recession are inter-linked to higher interest rates given that monetary policy tightening is aimed at reducing demand and thereby inflation. Meanwhile, geopolitics remains unpredictable and hence we will need to evaluate on a post-facto basis. 

From an investor behaviour perspective, asset allocation shift is something to be watch out for. We have moved to a higher interest rate scenario where returns from debt investment (adjusted for volatility) could now be attractive for some set of investors, and hence flows towards equities as an asset class may see some moderation. Another risk on the investor front is that we are coming out of an environment where many new investors have entered the equity markets and were fortunate to make quick money. This has led to higher risk appetite with preference for derivatives (essentially leverage) among retail investors to enhance returns. This could be a risk as the markets have moved away from that easy money-making environment and leveraged investors could face challenges.
 

Which three investment trends would you bet on for the long term? Also, which sectors seem attractive at current valuations?

When the economy grows, the gains flow across sectors, but with some lag. Linkages within the economy play out across various sectors. An item of expense for a sector becomes income for another sector. So, on a long-term basis, we are positive on every sector. From a fund management perspective, an eye on valuations helps. Valuations have proven to be a good equaliser in the equity markets as the prices discount growth expectations. A big theme in Indian economy and markets is likely to be the PLI-led export growth and | or import substitution, demography-led consumption and financial services.
 

Over the span of your career thus far, what has been your key learning from the equity markets?

Perhaps the key learning is that markets keep on forcing one to learn new things. Economic policies change, technologies change, new narratives such as ESG and ETF get created leading to new set of beneficiaries, etc. Markets surprise us on both sides, up and down. Maintaining a respect for valuations helps in the medium to long term and helps avoid short-term euphoria.