In conversation with Satish Ramanathan, CIO - Equity, JM Financial Asset Management

While the equity markets will continue to face the key risk of heightened inflation and rising interest rates, Satish Ramanathan, CIO (Equity), JM Financial Asset Management, feels that investors can also expect some buoyancy in the next quarter

What is your outlook on the Indian equity markets in the short to medium term?

In the short to medium term, we see some normalcy returning to the equity markets as the fear of the unknown wanes. Inflation and energy shortage are risks which are well-recognised by global markets now. China’s slowdown and its financial sector rumblings need to be observed. Until now, the Indian economy appears to emerge stronger from this formidable crisis. Hence, we expect the markets to have bouts of relief rallies followed by some days of declines as volatility indicated by the VIX index gradually normalises.

How will the forthcoming rate hikes by the Federal Reserve and the high likelihood of recession in the US affect the Indian capital markets? Which categories of funds are expected to do well?

The potential hikes in interest rates as well as quantitative tightening needs to be carefully watched. Commodity prices have declined globally apart from oil prices, as also shipping rates, so that we believe this will lead to lower incremental inflation.  Employment data remains strong. However, the implication is that the rate hike cycle is not over yet. The question is how will central banks react: will they raise rates to the extent of a slowdown in the economy or wait and watch for a gradual decline in inflation data? These questions will gradually be answered over time. In the interim, funds best positioned to handle volatility will continue to do well.

What changes have you made in your equity funds in view of the rising interest rates and high levels of volatility over the last few months?

We believe the high foreign portfolio investment (FPI) selling in Large-Caps has pushed down the valuations of large-caps, making some of them more attractive than the Mid-Caps. At a portfolio level, we have used this correction to increase our mid-cap exposure, though remaining overweight on large-caps. We are carefully monitoring the corporate results and making changes accordingly. We have increased the number of stocks and also the coverage to defensives and consumption such as FMCG and the automotive sector. We are witnessing some revival in capital expansion and expect the momentum to continue.

In your view, what are the pertinent risks facing the equity markets in H2FY23?

The equity markets will continue to face the key risk of heightened inflation and rising interest rates. The last few years have been bumpy as GST, the pandemic and inflation played their role one after another in impacting corporate performance. We have noticed that companies have used this volatility to their advantage by improving their financial health and rationalising costs.  Earnings in H1FY23 may be impacted due to the spill-over effect of inflation in raw materials but going ahead, we expect some normalcy in demand, stable prices and increased exports playing their role in improving corporate profits. Energy prices will continue to be a wild card as it influences discretionary spending power and the governments’ deficit due to higher subsidies.  To sum up, we are generally more sanguine regarding H2FY23.

How should a retail investor approach mutual funds in the present scenario?

In general, retail investors have been remarkably resilient about this market volatility as FPIs continued selling. Markets were overvalued before the correction started in October 2021 and there were global events which led to a further downturn. However, we are positive on the Indian economy. Many MNCs and large Indian corporates have benefitted from exports and the recovery in the domestic market. We suggest that a retail investor should continue to invest in equities with a distribution between large-caps and mid-caps to benefit from their growth.  A systematic investment plan in preferred funds could be the best way to ride out this volatility.

How has the earnings’ season been so far? Which sectors appear vulnerable to you?

The markets tend to look beyond the immediate news and so we expect the surprises in results would be well-absorbed. High inflation in raw materials will impact almost all companies other than pure service sector companies. In the next two quarters, the earnings may not pan out along expected lines but should normalise in H2FY23 as companies optimise their raw materials and increase prices. We expect there could be some disappointment in steel stocks as the export ban has curbed their profitability as also some of the FMCG stocks due to higher input costs. We expect this quarter to be a period of several cross-currents which need not be extrapolated.

Which three major emerging investment trends do you expect to dominate over the next decade?

Many big projects, which experienced delays due to various issues over the past few years, are now getting back on track. We see infrastructure and allied services becoming a sustainable theme in the future as government finances improve. We also see tremendous scope in services such as online delivery, quick service restaurants (QSRs), etc. as discretionary incomes move up.  This area is evolving very fast and could throw up winners for the next decade. The third area where we see scope is in financial technology. Obviously, this is not very big now but has the scope to disrupt and surprise positively.