It's a stock-pickers mkt; recovery to peak levels possible: Abhijit Bhave

'I strongly believe in the benefits of diversification within an asset class', said Abhijit Bhave

The markets will keep a close watch on the outcome of the Reserve Bank of India’s (RBI’s) policy meeting later this week and the subsequent commentary. Abhijit Bhave, chief executive officer at Fisdom Private Wealth, tells Puneet Wadhwa in an interview that after a 20–25 per cent decline from their peaks in the previous six months, mid/small-cap stocks have become more appealing. Edited excerpts:

What’s your outlook for the markets for the rest of the calendar year? Is a recovery to the peak levels seen in October 2021 possible?

The latest International Monetary Fund (IMF) report indicated that the post-pandemic recovery has been hampered by higher-than-expected global inflation, tightening of balance sheets by central banks, a slowdown in China, and also negative consequences of the conflict in Ukraine. In the current environment, investors' attention has changed from a company's top-line growth to profitability and its sustainability, on the back of increased volatility.

We should not base our investment choices just on index levels. I believe this is a stock-pickers market. In terms of a majority of the economic factors, India appears to be in good shape when compared to its global peers. Although predicting short-term market moves is difficult, we believe that there is a possibility of recovery to the peak levels of October 2021 by the end of this financial year, if not by the end of this calendar year.

Do you think if the US and other major global economies slip into a recession, it will prove to be a bigger worry for the markets than inflation?

Taming inflation is crucial in the current scenario. While we acknowledge that tighter monetary policy can affect economic growth, delaying action may only make things worse. High inflation causes real interest rates to go negative, which is much worse than a brief recessionary period. Over the coming two quarters, inflation and commodity prices will be in check, providing the foundation for a rise in the equity markets.

Is the risk-reward favourable for investment in mid-and small caps at the current levels?

After a 20–25 per cent decline from their peaks in the previous six months, mid- and small-cap stocks have become relatively appealing. There is no reason to think that this time will be any different. In the past, we have seen that Indian equities have produced solid returns over three-five years, following a substantial drop. On the mid- and small-cap fronts, investors would be better off investing in managed portfolios like MF/PMS as this market may see growth concentrated in fewer stocks.

Does it make sense to diversify into fore­ign markets amid this choppy phase?

I strongly believe in the benefits of diversification within an asset class. India makes up about 3.1 per cent of the global market capitalisation; therefore, if foreign equity investments are not included in a portfolio, opportunities to invest in strong worldwide brands and stocks would be lost. The time is opportune to start or continue international investments, with foreign equities making up between 10 per cent and 12 per cent of the portfolio.

Back home, should investors look at domestic economy-facing sectors or export-oriented sectors?

With the China-plus strategy in vogue, export-oriented businesses with strong balance sheets and low debt in industries like chemicals, textiles, and information technology (IT) can be ideal picks for investors; the depreciation of the rupee is an added advantage.

What has been your strategy amid the recent market correction?

In the current environment, we are predominantly overweight on banking, finance and insurance (BFSI), industrials, capital goods, and IT; we envisage that stocks in the auto and auto-ancillary space may add to a portfolio's alpha. We maintain a neutral stance on the metals, consumer discretionary and pharma sectors in the current scenario.

Are we in for a few quarters of mode­ration in earnings amid inflation woes?

 I believe that inflation and commodity prices would be kept in check over the medium term, laying the framework for an upswing in the value of stocks. For Nifty50 companies, consensus projections factor in an earnings CAGR of about 20 per cent over FY22-24. By FY23-end, we anticipate a significant rise in the Indian equity markets.

Is the phase of high commodity prices over?

The overall commodities sector and stocks performed well in the previous year but they have shifted gears in the past few months. Commodity prices moved northwards due to increased demand following the pandemic as more economies recovered and increased spending. Things cha­nged thereafter as central banks’ rate increases and corporate balance-sheet reductions, drained liquidity and concerns over sluggish demand sent comm­odity prices back to lower levels – this was also because of an anticipated recession in the US & EU and a slowdown in China. We believe that commodity prices may have peaked, and that further price normalisation in the agricultural and metals sectors is likely. We maintain a neutral stance on the metals and cement sectors.