Given the current phase of uncertainty in equity and fund markets, investors need to make the right choices through well-planned strategies, advises Sanjay Chawla, Chief Investment Officer (Equity), Baroda BNP Paribas Asset Management India Private Limited
With high levels of inflation set to persist going forward and further rate hikes, what is your outlook for Indian stock markets in the short to medium term?
Crude and various commodities have cooled off recent highs. We believe that barring undesirable shocks such as an escalation of hostilities between Russia and Ukraine or major supply disruptions, there should be a slow but gradual easing of inflationary pressures. As indicated by the monetary authority, the Reserve Bank of India (RBI), we estimate that the CPI outflow rate at 4QFY23 will be below 6% given current conditions. To add, in line with major actions by central banks such as the Federal Reserve or the European Central Bank (ECB), we expect the RBI to also take more action on rates to moderate inflation. Fortunately, if the July monsoon revival continues through the season, it could help ease some of the price pressures on food grains, fruits and vegetables.
The markets are however expected to remain volatile in the short term as we see several central banks such as the Federal Reserve and the ECB etc. take positive steps to temper inflation. We think the market is going through an adjustment phase as it realigns to the new norms of a slightly elevated cost of equity, a slower global growth forecast than before, etc. India, although far more resilient than most other economies, would still be no different in the short term. Thus, our growth remains one of the strongest in the medium term. Analysts would slowly start to move towards FY24 earnings also in the next two quarters. We therefore remain positive in the medium and long term.
What changes have you made to your equity funds given the rise in interest rates and the volatility of recent months? Currently, are you more focused on growth or value stocks?
We construct the portfolio based on certain growth and macro assumptions. If any of the assumptions change, we can change the allocation tactically or structurally accordingly. This in itself creates interesting investment opportunities. Given macroeconomic developments, including rising interest rates and high inflation, we modified our portfolio to ensure there was less impact while keeping our long-term structural outlook intact. . We reduced our exposure to companies whose earnings were sensitive to rising interest rates or to companies with debt or rising commodity prices.
Two sectors that we believe could benefit from the current scenario would be banking and automotive. The banking sector had slowed during the pandemic, but now credit growth is picking up nicely. We believe the investment opportunity is perfect given the underperformance of the past two years. Likewise, the automotive sector is expected to recover as chip shortages ease and raw material prices decline. Funding for increased exposure came from the reduction in the commodities sector. We continue to focus on companies offering growth and are available at reasonable prices. Historically, growth-oriented companies in emerging markets like India have generated superior and sustainable returns over a longer period.
Could you shed some light on the investment philosophy behind the recently launched Baroda BNP Paribas Flexi-Cap fund?
Baroda BNP Paribas Flexi-Cap Fund is going to stick to its label by being truly flexible in investing across market caps such as large, mid and small caps diversified across sectors and stocks. Large Caps can provide relative stability and liquidity to the portfolio while Average capitalizations and small caps have the potential to provide growth momentum. Baroda BNP Paribas Flexi-Cap Fund would have a unique three-step investment process while adhering to Baroda BNP Paribas AMC’s core investment philosophy of Business, Management and Valuation (BMV). This approach includes:
- Top-down approach to select sectors based on various global, political, national macroeconomic factors and sector dynamics.
- Horizontal approach to choose the optimal market capitalization in each segment considering various parameters in large, mid and small cap indices.
- Bottom-up approach to choosing stocks.
Our core BMV investment philosophy is grounded in valuing businesses with moats to ensure sustainable earnings growth and evaluating management beyond governance to assess how they approach various economic cycles. Finally, we rate and evaluate companies on the basis of profitability (cash) to make our investment decisions.
How has the earnings season been so far? Which sectors do you consider vulnerable?
The current earnings season is quite interesting considering it is the first quarter without a base effect and the fact that we had seen high commodity prices which have since eased. Among companies that reported results, revenue largely met expectations across all sectors. However, margins were affected by higher raw material and labor cost inflation.
Overall, for companies that have reported results so far, the shortfall is likely in the lower single digits. Sector-wise, banking, cement and metals beat earnings estimates while IT saw some cuts. The global macroeconomic environment continues to be challenging, with the United States likely to experience slower growth. As a result, global sectors such as metals and technology could face demand issues in the coming quarters. It would be interesting to see how the earnings season ends and what would change in consensus earnings estimates.
What are the top three emerging investment trends that you think will dominate over the next decade?
We believe that three themes will dominate this decade in India, namely energy transition, digitalization and the renaissance of manufacturing. India has taken the initiative to promote new energy sources such as renewable energy, ethanol, electric vehicles and green hydrogen. We anticipate significant growth in each of these spaces and a multiple increase in demand for these sectors over the decade. Digitization is going to become more and more relevant as we move forward, not only in B2C sectors but also in B2B sectors, as applications such as the Internet of Things (IoT) become more popular with the advent of 5G technology.
As e-commerce gains space, not only companies in that space would benefit, but related sectors like logistics and warehousing are likely to grow and be relevant from the perspective of institutional investors. . Finally, India is witnessing a renaissance in manufacturing with the Indian government promoting the Production Incentive Program (PLI). This is a timely move as the world transitions to the China+1 sourcing strategy. The combination of these two factors could provide a significant head start in expanding the manufacturing footprint of the India.
How should retail investors manage today’s market volatility with mutual funds?
There are certain mantras that I have learned that help in wealth creation:
- Volatility is an integral part of equity investing. Use this volatility to your advantage by allocating more to equities. Historically, we have seen many such declines in stock markets for a variety of reasons. Ultimately, fundamentals win out and equities, as an asset class, have generated superior risk-adjusted returns over a longer period.
- Don’t try to time the market. Time spent in the markets is more important than trying to guess when to enter and exit the market.
- Stick to your asset allocation plan. Superior returns are obtained by establishing an allocation plan adapted to your risk profile according to your financial objectives.
- Be disciplined in asset allocation. Do enough research on your products before making an investment to assess the risk, then use that research to adhere to the plan. Don’t let market noise or short-term price movement affect your actions.
As a retail investor, one should focus on a Systematic Investment Plan (SIP) and a Systematic Transfer Plan (STP) in a volatile market. SIPs perform very well in volatile market conditions thanks to cost averaging. It also creates a disciplined approach to investing and helps build a body for long-term financial needs. In addition, increasing the asset allocation to equities in times of downside volatility helps build long-term wealth and therefore the STP approach can also promote rational behavior. Sticking to long-term financial goals is key in a volatile market. As a retail investor, one should not panic and increase the asset allocation to equities in times of downward volatility. The Baroda BNP Paribas Flexi-Cap fund can be a good investment option in these times with an optimal allocation of market capitalization as well as diversification between sectors and equities.