Some moderation in domestic flows cannot be ruled out: Rahul Singh

It has been a circumspect start to the second half of calendar year 2022 (CY22) for global financial markets as they look for tangible evidence of inflation being restrained by global central bank actions. RAHUL SINGH, chief investment officer for equities at Tata Asset Management, in conversation with Puneet Wadhwa says clarity on global macros will be critical to providing further direction for equities. Edited excerpts:

What is your outlook for markets for the rest of CY22?

The Nifty50 is now trading at a forward price-to-earnings multiple of 17x, which is below the past five- to 10-year average. It, however, still does not fully adjust to the scenario of sustained high interest rates and/or deep global slowdown.

Given the strength in domestic flows, the markets will be in a phase of range-bound movement, in addition to volatility.

Clarity on global macros - whether it is a soft landing or a prolonged deep slowdown - will be critical to providing further direction for equities in India and elsewhere.

Is it a good time for investors to start buying the dip?

Investors should follow the barbell strategy in these times. (It is an investment concept that suggests that the best way to strike a balance between reward and risk is to invest in the two extremes, while avoiding middle-of-the-road choices.)

To protect from downside and take advantage of volatility, there should be greater reliance on hybrid fund categories like balanced advantage funds.

If the global slowdown is placid, certain segments are well positioned to generate alpha, specifically value funds, banking and financial sector, and small-caps.

How should investors approach mid- and small-caps now?

Given the nature of economic outlook characterised by capital expenditure (capex) recovery and cyclicals, mid- and small-caps offer equal investment opportunities.

While the short-term valuation differentials may favour large-caps, this is not a case of overvaluation in mid- and small-caps like it was in 2017 or mid-2021.

One has to be market capitalisation-agnostic in the current context of the Indian economy, which is becoming more broad-based.

Your expectations from the June quarter earnings season?

There are risks of minor downgrades in the information technology (IT) sector, as well as sectors where input costs have gone up or are energy-intensive.

In contrast, the banking sector can sustain or enhance growth expectations.

How are you approaching the IT sector in the backdrop of a possible recession in the US and Europe?

The IT sector still offers good growth visibility. But there are risks emerging on IT budgets, given the anecdotal data points emerging from retail and banking, financial services, and insurance that point towards a slowdown.

In addition, there are cross-currency headwinds, and the margin relief from hiring and price renegotiations could take longer.

How do you see retail and mutual fund (MF) flows play out in the second half of CY22?

The trend in foreign institutional investment (FII) flows will be a function of further valuation adjustment and global macros. A soft landing in the global economy in response to the rate hikes will be a positive for emerging-market (EM) equities, including India, since valuations are more reasonable now.

In the other extreme scenario of global recession, while India’s premium to other EMs will sustain, FII flows will take longer to come back, and valuations can continue to adjust downwards.

Domestic MF flows have matured a great deal. They have grown reliable and can relatively sustain. Some moderation in domestic flows cannot be ruled out, given the increasing yields in debt and lower one-year rolling returns in the second half of CY22.

The government is hoping that capex plans and their implementation will help resuscitate a gasping economy. Why will companies undertake capex at a time when global central banks are out to kill demand to rein in runaway inflation?

The private capex cycle revival is happening on account of corporate sector balance sheets becoming stronger.

Some capex trends are structural in nature i.e., renewables, automation, and production-linked incentives, and may not get impacted much by a tightening monetary policy.

Besides, we are also likely to see a revival in environmental, social, and corporate governance-challenged sectors (like energy and metals) in view of the increased importance in the current geopolitical context, as well as high energy prices.

What has been your investment strategy amid the recent market rout?

Our investment strategy has been to stay balanced between growth and value, with higher interest rates likely to make markets much more valuation-conscious than in the past few years.

We prefer banking as credit growth, low credit costs, and reducing financial technology disruption risk are paired with low- to mid-cycle valuations.
 

Selective segments of industrials and capital goods are also seeing demand revival, although valuations have caught up recently.