Volatility is a part of equity market, but India remains a bright spot

Volatility is an inherent part of equity market and can’t be wished away. The optimal strategy for an evolved investor would be to adopt proper asset allocation across all asset classes based on their risk and income profile and individual goals besides each asset’s valuations/attractiveness, Karthikraj Lakshmanan, Fund Manager & SVP, UTI AMC, tells Bizz Buzz in an exclusive interview. Sharing his view on the recent market corrections, he says, “Domestically, possibility of below average monsoons and impact of global slowdown on India’s growth seem to be top of the mind issues. While it is difficult to gauge how all these events would play out, India seems to be in much better spot and is expected to grow close to 6 per cent in the current financial year, making it one of the highest amongst large economies”

Given the current global and domestic developments, investors on D-Street find themselves in a dilemma. What would be the best approach to navigate and capitalize on this volatility?

Volatility is part and parcel of the equity market. At most points in time, there would be some event about which the market would have uncertainty and bring along volatility. That is the nature of equity market, and one would be better off to live with them rather than trying to avoid them. As of mid-2023, the key concerns globally are about the impact of global central banks action of raising interest rate rapidly in last one year, US regional banks crisis, the debt ceiling issue in United States and the higher inflation print. Domestically, possibility of below average monsoons and impact of global slowdown on India’s growth seem to be top of the mind issues.

While it is difficult to gauge how all these events would play out, India seems to be in much better spot and is expected to grow close to 6 per cent in the current financial year, making it one of the highest amongst large economies. Our forex reserves are comfortable, crude prices correction in recent months is positive, bank and corporate balance sheets are healthy, interest rates are close to peak, and inflation seems under control. Earnings growth for Nifty-50 are expected to be in mid-to-high teens which is good even if there are some cuts to that number. Valuations are higher than long term average forward price to earnings ratio by 10-15 per cent. We believe if there is any correction in markets due to global or other events, long term investors with over 5 years investment horizon could increase allocation to equity as risk reward becomes more favourable.

What is your view on the recent market corrections?

Markets have been sideways for last the year and half after a strong rally from March 2020 lows during which earnings have grown and hence valuation multiples have seen some time correction and have slid down little closer to the long term average. However, as mentioned before, they are still slightly expensive. Valuation metrics act as a tool in helping the investor in asset allocation. Hence, when compared to the November 2021 peak, equities are definitely more attractive, and one could look to increase equity allocation on further correction or in a staggered manner over next few months with a long term view.

What sectors show potential for investment opportunities currently, and which sectors should be approached with caution or avoided altogether?

For UTI Mastershare, which is a large cap fund, we have increased exposure to IT sector recently and have gone overweight. The sector has displayed some of the best corporate governances, high cashflow generation, high payout of these cashflows in last few years and a long-term growth opportunity in global digital transformation and cloud migration. Towards end of CY21, the valuations had moved up significantly and there were cost pressure due to higher employee costs. However, the sector has seen absolute price correction, the earnings have grown during this period adding to time correction; and the salary hike and attrition issues seem to have normalized. While the current fear is of a sharp slowdown in the developed economies impacting IT services growth, part of the impact has already been factored in and the long-term opportunity remains intact. Slowdown in the global economy could provide more outsourcing business opportunity for the Indian IT companies as their global clients look to curtail costs in a tough macro environment. Hence, we have added to the exposure as risk-reward seems to be in favour at current levels.

Within the consumer segment, we are underweight staples and overweight discretionary. While the entire sector is expensive, we believe the discretionary part of the sector could still have higher growth for longer due to lower penetration and lower share of organized sector both of which could increase in next decade as the young nation demographics is in favour.

Besides, we prefer private banks within financials as we believe the large private banks would continue to gain market share. The banking sector itself could grow faster than the nominal GDP due to better credit penetration and financialization of savings. Within that, the private sector banks could keep growing their share as they are investing on digitization and are focused on growth pockets like SME and retail on the lending side. On the deposit side, the private banks have been able to get good share of low-cost CASA (Current and Savings Accounts) franchise through their marketing efforts, product and service offerings. From asset quality perspective, the current juncture seems to be the best in last many years. While this may change in the future and the banks will go through asset cycles, they have some credit provision buffers and they have shored up their equity capital level too in last few years. Thus they seem to be in better shape now to manage asset quality cycles.

We are overweight on the auto sector as well where the cycle has been bad in last few years and FY23 has been the first year of recovery. While valuations are not as attractive as a year before and volume growth recovery on favourable base has partly played out, there is potential of good earnings growth helped by margin recovery due to lower input prices. The current low penetration levels provide visibility for long term volume growth as per capita income increases.

We continue to be underweight in Oil & Gas, Metals and Power Utilities as valuations are no more attractive after their outperformance in past 2- 3 years, considering their relatively lower return ratios and long-term growth potential.

During periods of market volatility, what would be considered an optimal investment strategy? Is multi-asset allocation advisable in such circumstances, and if so, what would be an appropriate multi-asset allocation strategy?

As mentioned earlier, volatility is an inherent part of equity market and can’t be wished away. The optimal strategy for an evolved investor would be to adopt proper asset allocation across all asset classes based on their risk and income profile and individual goals besides each asset’s valuations/attractiveness. It is difficult for a one shoe fits all approach when it comes to investment and asset allocation and hence there is a need for multiple products which the mutual funds offer. However, for investors who are new to equities, having some equity exposure is more important than trying to time the market as they have a long runway of investing period when they would be net buyers of equities and hence would be better off should there be correction.

Do you agree with the notion that periods of volatility present numerous investment opportunities?

Borrowing from Warren Buffet’s words, Mr. Market could be euphoric on certain days and give a very high price quote and could be depressed on other days when he gives a very low price quote. The more manic-depressive his behaviour, the better for you. In short, volatility definitely provides loads of opportunities to investors. Equity investors would be better off avoiding emotional and behavioural decisions in such times and rather use the market volatility to their advantage by following the simple yet difficult rule of being greedy when others are fearful and fearful when others are greedy.