We've stayed away from high-flying, new-age loss-making cos: Aniruddha Naha

Equity markets have regained lost ground in the last few weeks as foreign outflows began moderating and corporate earnings remained resilient. These factors keep Aniruddha Naha, Head- Equity, PGIM India Mutual Fund, upbeat on Indian equities. In an interview with Harshita Singh, Naha says that fears of a recession are less of a concern for India than the developed markets and that domestic equities are likely to remain more insulated to global macro challenges. Edited excerpts:

Have we found a bottom or is it wise to remain watchful?

There seem to be some visible differences in the outlook of developed countries and India. While inflation is a common theme, the fears of a recession don't seem to be as much of a concern for India as may be the case with the US and Europe. Even when the macro challenges of inflation, interest rates, and fiscal deficit persist, corporate India continues to see strength in its demand outlook and sustainability of margins. The fall in commodity prices is a relief on the margin front. Add to that, comfortable valuations across the market. India should continue to do reasonably well unless one sees a major global macro challenge emerging.

US inflation is not showing signs of moderation, unlike in India. What does this difference mean for domestic markets?

Lower commodity prices should start reflecting in the US inflation data also as the US bond yields are reflecting a moderation in inflation going ahead. In case the inflation rate continues to trend upwards, interest rate hikes might continue, which will accentuate the risk-off sentiment globally and could in turn lead FIIs to continue selling Indian equities.

What would be your strategy to benefit the most from current volatility?

We have focussed on good quality businesses with strong balance sheets and good cash flows. In a rising interest rate and tightening liquidity scenario, markets will realise the importance of cash flows to support valuations. During a market revival, these good-quality businesses should bounce back.

We have stayed away from the high-flying, new-age loss-making technology platform-based companies since their IPOs and we stand vindicated.

With steeper correction in broader markets, should investors look at mid & small-caps?

Midcaps and small caps have corrected in line with the market or a little more. The growth visibility for many mid and small caps continues to remain strong over the next three to five years, as valuations are quite reasonable.  

 Which sectors are you underweight and overweight in?

We remain upbeat on domestic themes and cautious on those with global linkages.

Given the clean balance sheets and strong capacity utilisation across corporate India, we are positive on industrials, capital goods and cement. We also like auto and auto ancillary as a sector. We remain underweight on commodities amid inflation risks and consumer staples from a valuation perspective.

What do you infer from the June quarter results and corporate commentary so far?

The results so far have been very encouraging. Demand continues to be robust, credit growth remains strong, and margin pressure does exist in some industries but that too should start abating incrementally.

The order books of engineering companies remain strong, which lends visibility to incremental capital expenditure and earnings growth. The corporate commentary also continues to remain positive. Most sectors, including IT, do not see any major risk as of now.

What's the road ahead for domestic and foreign flows?

Domestic flows have held up very well. Financialisation of assets and increasing apportion of household wealth towards equities/equity-oriented MFs should continue to see sustained trends of inflows, though there might be some small hiccups.

FIIs have sold India over the last 9 months and money has largely moved to dollar-denominated assets. The reversal should start once the market senses a peaking out of interest rates, which should begin the risk on trade.