Time in the market is more important than timing the market - Surjitt Singh Arora

In conversation with Surjitt Singh Arora, Portfolio Manager - Portfolio Management Services, PGIM India Asset Management Pvt Ltd.

Q) What is your take on the current equity market scenario?

We are cautious about the market in the near term as inflation is likely to eat into profit margins of corporate India. Two risks in 2022 that could impact short-term returns are a) the expected interest rate increases globally and b) supply-side pressures on account of supply chain disruption. However, over a 3 to 5-year period, many stocks could generate strong returns for investors given their sustainable business models and strong balance sheets. E.g, the low debt position of Corporate India - 396 companies from the BSE 500, excluding Financials, have seen a 7 per cent drop in net debt in FY21 over FY20 levels. The net debt-to-equity ratio declined to 0.59x from 0.73x, which is the lowest since FY16. 

Q) How will the Russia-Ukraine conflict impact the investing landscape, especially shifting towards sustainable investing and ESG?  

 As a result of the Russian-Ukraine conflict, every country is contemplating being “Átma-Nirbhar i.e., self-sufficient”. However, given the reserves and the scale of Russia and Ukraine in the current environment, it would not be an easy task. India is focussing on the ‘Make-in-India’ theme e.g., in defence, several components and equipment are now getting produced in India itself. 

Q) Rising commodity prices and slowing growth, what is the probability you will attach to a situation of stagflation? In such a scenario what should an investor do?  

 We believe individual investors can increase allocation to defensive sectors like Pharma and IT. In addition, domestic consumption-oriented sectors would do well, in our view. Investors should stay put with their SIPs in MFs. 

Q) When do you see RBI raising rates and how will it impact different sectors?  

Given where crude is and the inflationary environment, we believe RBI would start increasing rates from Q1FY23 onwards. Overall higher interest rates can have an impact on valuation multiples for the overall market where high PE stocks could see some contraction in multiples. In our view, Financials (read banks) may gain in a rising interest rate regime given their ability to raise rates. Real Estate and Infra (high leverage) may get impacted. 

Q) Which is your sector preference for 2022 and which are out of favour for now?  

We have two investment approaches in our PMS – a) Core Equity Portfolio, a multi-cap approach that follows Growth at Reasonable Price (GARP) in line with our overall investment thought process. I believe that a strategy that takes active steps to minimize the incidence of errors listed below, enhances the chances of success in the stock market. 

Permanent capital loss occurs as a result of three factors: 

— Buying shares of companies with weak or deteriorating fundamentals 

— Buying shares of companies where the management quality standards are below par, and 

— Buying when the share price is exorbitantly high. 

a) In the Core Equity Portfolio, we prefer sectors such as Industrials, Digitization, Chemicals and Consumption. Incrementally, Financials (mainly banks) would do well, as alluded to earlier, given the rising interest rate environment. In terms of portfolio construct, we maintain a balance between concentration as well as diversification. Our average number of stocks in the portfolio is in the range of 20-25. No individual stock weight is higher than 10% and no particular sector can exceed 30 per cent. 

b) In the Phoenix Portfolio, we follow a mid and small-cap oriented approach, mainly investing in Structural and Cyclical companies. In the Phoenix portfolio, we prefer Consumption, Healthcare, Building materials and Real Estate as sectoral themes.  

Q) What are your expectations for Q4FY22 and Q1FY23 earnings growth for India Inc?  

 Given the unprecedented cost pressures and the inability to pass on the full impact to the end consumer, I expect Corporate India’s EBITDA margins to trend lower thereby impacting profitability. Except for the recovery plays like Hotels, Malls and Multiplexes, the majority of sectors could witness downgrades in earnings in Q4FY22 and Q1FY23. CY22 would be a difficult year and a return of even 8-10% would be reasonable.  

Nifty is up 11 per cent (outperforming emerging markets) over the last 12-month period, despite foreign selling of USD 28 billion in the secondary market, thanks to strong domestic buying. The strength of domestic buying has increased gradually since 2014. Retail flows can sustain as households save USD 700 billion+ annually. While a market correction due to rate hikes and premium valuations remains a risk, domestic buying should likely smoothen declines. 

Q) What will be your advice to investors at the current juncture? 

 Investors may increase their allocation to equity in the next 3-6 months, as over the long-term earnings would rebound over the FY22-FY24 period. Time in the market is more important than timing the market.