Long-term investors can bet on multi or flexi caps: Nippon India MF's Bhan

India’s economy is well placed to deliver reasonable growth in the near term on the back of demand normalisation and manufacturing revival. However, earnings may remain under pressure due to weakening global growth, says Sailesh Raj Bhan, CIO – Equity Investments, Nippon India Mutual Fund, in an interview with Abhishek Kumar. Edited excerpts:

Has the Budget brought about any change in your strategy or sectoral outlook?

The Budget is well-balanced as it retains growth impetus through strong capex push without compromising on fiscal consolidation. Overall, the Budget continued the focus on reviving the investment cycle and lowering financial burden by rationalising subsidies. Our portfolios were focused on domestic growth possibilities across segments like banking, manufacturing and aspirational needs/lifestyle changes, among others. All these areas have been further supported by the budgetary proposals around infra push and changes in the new tax regime, among others.

What mix of equity funds would you recommend to an investor looking to allocate for five years?

Accordingly, long-term investors based on their risk appetite can consider ready-made diversified strategies like multi-cap or flexi-cap funds. These funds invest across market-capitalisation range and offer a combination of market leaders and emerging leaders. The Indian economy is supported by strong fundamentals, growth-oriented policy measures and favourable demography. These can lead to robust growth over the medium term with broad-based participation. This expected growth revival can provide potential opportunities across sectors and market sizes.

What is your market-return expectation in the next two years, considering the GDP growth estimates and current valuations?

The Indian economy appears to be well placed for reasonable growth supported by demand normalisation and manufacturing revival. Policy reforms of the past few years, investments in capex, stronger corporate balance sheets alongside a transition to a multi-polar world can aid manufacturing, exports, and capex. This will potentially create a virtuous cycle of growth. Yet, near-term global uncertainties are unlikely to wither away soon. Therefore, it would be wise to have moderate return expectations in the near term. Earnings growth can remain challenging for some time as global growth is weakening and local economic conditions can come back to a normal trend after the strong recovery post-Covid. Investors should ideally consider equity allocations from a medium-to-long term perspective and equities can deliver potentially superior real returns over this period.

What does the third quarter tell about the state of companies and sectors?

The third quarter results, while being mixed, appear better than the previous quarter. Select global-and-rural focused segments have witnessed demand headwinds while the domestic growth-oriented segments have been largely in line with expectations. On a positive note, the increased pressure on margins due to higher raw material costs seems to be easing. Going forward, we think raw material inflation will be low because it is already being captured in the base and the prices are mostly stabilising.

PSU banks have come under pressure after a strong rally in 2022. Is the run up exhausted?

PSU banks have witnessed a meaningful recovery after sharp value erosion in the recent past. Leaders in the PSU banking space with strong balance sheets look well placed to participate in the anticipated revival in credit growth over the medium term.

How is India placed among other markets to attract foreign funds this year?

Indian markets offer potentially attractive medium-term opportunities available across various sectors and size categories. At the same time, India’s valuations appear elevated compared to peers. Thus, the fund flows would largely be determined by growth versus valuation metric.

What are some major factors or events, which will guide the markets?

One of the key guiding factors over the year will be the trajectory of the already-higher interest rates and as to how long the rates will remain elevated. China’s recovery is another factor that needs to be monitored as this can influence the prices of key commodities. From a domestic context, we appear to be in a cyclical recovery phase.