In conversation with Sanjay Chawla, CIO - Equity, Baroda BNP Paribas Asset Management India Private Limited
Given the current phase of uncertainty in the 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 expected to persist in the future along with more rate hikes, what is your outlook on the Indian equity markets in the short to medium term?
Crude and various commodities have cooled off from their recent peaks. We do believe that unless there are untoward shocks such as escalation in hostilities between Russia and Ukraine or some major supply disruptions there should be a slow but gradual easing of inflationary pressures. As the monetary authority, Reserve Bank of India (RBI), has indicated, we do see the exit rate for CPI in 4QFY23 to be sub 6 per cent given current conditions. To add, in line with major central bank actions such as the Federal Reserve or the European Central Bank (ECB), we expect the RBI as well to take more rate actions to temper inflation. Thankfully, if the recovery in monsoon in July sustains through the season, it might help alleviate some of the price pressures in food grains, fruits and vegetables.
The markets however are expected to remain volatile over the short term as we see multiple central banks such as Federal Reserve and ECB, etc. take affirmative action to temper inflation. We believe the market is going through a phase of adjustment as it realigns itself to the newer norms of marginally elevated cost of equity, a slower global growth forecast than before, etc. India, though much more resilient than most other economies, yet would be no different in the short term. Hence, our growth remains one of the more buoyant ones in the medium term. Analysts would slowly start rolling forward to FY24 earnings as well in the next couple of quarters. We therefore continue to remain positive over the medium to long term.
What changes have you made in your equity funds in view of the rising interest rates and volatility over the last few months? Currently, are you more skewed towards growth or value stocks?
We construct the portfolio based on certain assumption of growth and macros. If any of the assumptions change, we accordingly may change the allocation either tactically or structurally. This in itself throws up some interesting investment opportunities. Considering the changing macros, including rising interest and elevated inflation, we changed our portfolio to ensure there was least impact while keeping our structural long-term outlook intact. We have reduced our exposure to companies whose earnings were susceptible to rising interest or leveraged corporates or higher commodity prices.
Two sectors which we believe could benefit from the current scenario would be banking and automotive. The banking sector had slowed down during the pandemic but now credit growth is picking up well. We think the investment opportunity is just right given the underperformance in the last two years. Similarly, the automotive sector likely to pick up based on easing of chip shortage and fall in commodity prices. Funding for increased exposure had come from reduction in the commodity 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 delivered superior, sustainable returns over a longer time 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 capitalisation such as large, mid and Small-Caps diversified across sectors and stocks. Large-Caps can provide relative stability and liquidity to the portfolio while Mid-Caps and small-caps have the potential to provide growth momentum. Baroda BNP Paribas Flexi-Cap Fund would have a unique three-step process for investing while sticking to Baroda BNP Paribas AMC’s core investment philosophy of business, management and valuation (BMV). This approach comprises:
- Top down approach to select sectors based on various global factors, policies, domestic macros and sector-specific dynamics.
- Horizontal approach to choose optimum market-cap in each segment considering various parameters in large, mid and small-cap indices.
- Bottom up approach to choose the stocks.
Our core investment philosophy of BMV is premised on assessing business with moat to ensure sustainable earnings growth and evaluating management beyond governance to assess how they tackle various business cycles. Finally, we assess and evaluate companies on basis (cash) profitability to make our investment decisions.
How has the earnings’ season been so far? Which sectors appear vulnerable to you?
The current earnings’ season is quite interesting in light of being the first quarter without a base effect and the fact that we had seen elevated commodity prices which have come off since then. Of the companies who have announced results, revenues have largely met expectations across sectors. However, margins have been impacted led by higher inflation in both raw material and people costs.
On an aggregate for companies who have announced results so far, earnings’ miss is probably at low single digit. Sector-wise, banking, cement and metals have beaten profit estimates while IT has seen some cuts. The global macro environment continues to be challenging with the US likely to see slower growth. Consequently, global sectors such as metals and technology may face demand challenges over the next few quarters. It would be interesting to see how the result season ends and what would change in consensus earnings’ estimates.
Which three major emerging investment trends do you expect to dominate over the next decade?
We believe that three themes will dominate this decade in India, which are energy transition, digitalisation and manufacturing renaissance. India has taken lead in promoting new energy sources such as renewables, ethanol, electric vehicles and green hydrogen. We expect significant growth in each of these spaces and multi-fold increase in demand for these sectors during the decade. Digitalisation is going to be more and more relevant as we move ahead, not only in B2C sectors but also in B2B sectors as applications like Internet of Things (IoT) become more popular with the advent of 5G technology.
As e-commerce gathers space, not only companies in that space would benefit, allied sectors like logistics and warehousing are likely to scale up and be relevant from institutional investors’ perspective. Lastly, India is witnessing a manufacturing renaissance with the Indian government promoting the Production Led Incentive (PLI) scheme. This is a timely measure as the world is moving to China + 1 strategy for sourcing. The combination of these two factors could give a significant leg up to increasing the manufacturing footprint of India.
How should retail investors navigate the current market volatility with mutual funds?
There are certain mantras that I have learnt which help in wealth creation:
- Volatility is part and parcel of equity investments. Use this volatility to your advantage by allocating more to equity. Historically, we have seen many such draw-downs in equity markets for various reasons. Eventually, fundamentals prevail and equity as an asset class has delivered superior risk-adjusted returns over a longer period.
- Don’t try to time the market. Time in the markets is more important than trying to second guess when to enter and exit the market.
- Stick to your asset allocation plan. Superior returns are made by making an allocation plan suited to your risk profile based on your financial goals.
- Be disciplined when it comes to asset allocation. Do enough research on your products before making an investment to assess the risk, and then use that research to adhere to the plan. Don’t let market noise or short-term price movement impact your actions.
As a retail investor, one should focus on a systematic investment plan (SIP) and systematic transfer plan (STP) in the volatile market. SIPs work very well in volatile market conditions through cost averaging. This also creates a disciplined approach towards investing and helps in building corpus for financial needs in the long term. Further, increasing asset allocation in equities at the time of downside volatility helps in creating long-term wealth and hence the STP approach can also help rational behaviour. Sticking to long-term financial goals is the key in a volatile market. As a retail investor, one should not panic and increase the equity asset allocation during downside volatility. Baroda BNP Paribas Flexi-Cap Fund can be a good investment option during these times with optimum market-cap allocation as well diversification across sectors and stocks.