In conversation with Meenakshi Dawar, Fund Manager, Nippon India Mutual Fund

In environments of rising yields and higher inflation expectations, value stocks are placed better than growth stocks, asserts Meenakshi Dawar, Fund Manager, Nippon India Mutual Fund

What do you prefer in the current market scenario - value stocks or growth stocks? Can you elucidate the same?   

The current market scenario has lots of push and pulls in place. On the one side we are seeing the economy recovering from the severe shock of the pandemic, thus leading to normalisation in lot of sectors and on the other side we have global shock because of the Russian-Ukraine conflict, rising commodity prices and high inflation. In an environment when yields globally are rising, any company which derives lot of its value from future cash flows has a higher risk to its value than the company that can be justified with near-term cash flows.

Therefore, in such environments of rising yields and higher inflation expectations, value stocks are placed better than growth stocks. Historically also we have seen a high correlation between the performance of value stocks and inflation. Also, if you look at the earning delivery and fundamentals of companies which are traditionally bucketed as value such as commodities, infrastructure, financials, energy, etc, these are delivering better numbers and the confidence in future earning delivery is also high. Whereas companies that are classified as growth companies are facing challenges both in revenue growth and margins.    

With inflation taking centre-stage, which sectors appear vulnerable to you?  

Prior to the pandemic, the world had very low inflation and the growth was very narrow. As a result, the stocks which were delivering earnings growth saw a very sharp PE re-rating. These were mostly linked to the consumption and the demand side. Now with a revival in lot of commodity prices, the input cost for these sectors have gone up and they will face challenges in holding up margins. Also, the revenue growth gap of these sectors versus the market has narrowed. The focus of the market is now shifting from the demand side to the supply side. The companies which cater to the supply side are showing higher growth and resilience. We are also seeing a cyclical revival in various sectors like real estate, manufacturing and infrastructure.

Stocks of several new-age tech businesses such as Zomato, Nykaa, Paytm and Policybazaar have witnessed a sharp meaningful correction in recent months. Has a window of opportunity opened up? How should the investors approach these new-age companies?   

When you buy new-age businesses in India you buy them for what they can do in the future as most of them have negative cash flows currently. A lot of excesses, which got built into these names, have corrected post their listing. We will prefer companies with favourable industry structures i.e. consolidated sectors with large profit pools, high focus on capital efficiency, superior management and strong corporate governance. 

In your view, what are the pertinent risks facing equity markets in FY23?  

If you look at broader market valuations and earnings’ estimates, the consensus expectation of earnings growth will be around 15 per cent with valuation trading at least 20 per cent higher than the long-term averages. The delivery of this earning will depend a lot on the trajectory of the investment cycle and earning an impact on consumption stocks because of rising input costs. Another big factor impacting our macro will be the trajectory of oil prices. As we are a large importer of oil and its derivates, the sensitivity of our current account and currency is very high on oil prices. Also, one positive factor for the good performance of our market versus other emerging market peers is the strong participation of domestic investors. How the domestic pool of money behaves going forward will be an important variable to watch out for.