A correction in the Indian stock market is long overdue, and the escalation of the war between Iran and Israel, coupled with rising oil prices, was merely an external trigger, says NIMESH CHANDAN, chief investment officer (CIO), Bajaj Finserv AMC.
In an email interview with Nikita VashishtChandan says large caps offer better risk-reward in the current market and investors can make contrarian bets for long-term wealth creation. Edited excerpts:
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Q) Indian stock markets took longer to stabilize compared to global peers after the war between Israel and Iran escalated. What is disturbing the markets and what will drive a sustainable recovery?
Over the past year, the markets have seen a strong rally, especially in the mid-cap and small-cap categories. Certain themes such as Defense and PSUs have seen a sharp upward movement in the last twelve months. Because valuations in many sectors were reasonably too high, a correction was looming.
Geopolitical tension and a rise in Brent crude oil prices were the trigger. However, the Indian economy and business sector remain strong and growth remains attractive. After a correction, we will likely resume the bull market rally. However, we may see a change in leadership in the market with rotation within sectors and stocks.
Q) Should one seek the safety of large caps in this uncertain phase for the markets?
While it is difficult to generalize to the mid-cap and small-cap categories, one can note that there are many companies in this category with high valuations. Therefore, the risk-reward ratio is favorable in large caps today. Over the past three months, we have seen large caps outperforming mid and small caps. Investors now also seem to prefer large caps.
Q) Are markets worried about further downgrades after Q2 results? What are your expectations? What are the key trends for investors to watch?
Given high valuations and investor expectations, there may be some disappointments after the July-September quarterly results (Q2-FY25). In recent months we have seen sharp downward movements in companies that have experienced some negative development, but no commensurate upward movement in companies with good news. This shows that the markets are already pricing in many positive things. September quarter results are expected to be moderate overall.
The sector rotation also signals that investors are moving into sectors with strong earnings visibility, such as consumer staples and pharmaceuticals. Revival in rural growth, improvement in the auto sector, especially two-wheelers, and a slowdown in government investment are the key trends to watch out for. Commentary on the holidays is eagerly awaited.
Q) Do you expect FII outflows to increase in future if the RBI keeps interest rates stable for long?
We believe that India has a favorable position within emerging markets and is therefore likely to attract foreign flows. We are already seeing positive flows in the fixed income market due to its inclusion in the global bond market indices.
With liquidity and interest rates expected to decline globally, emerging markets including India are likely to benefit from new investments. In the short term, it is the non-economic cycle factors that can cause volatility in flows.
Q) What is your investment strategy to combat the current market downturn? Should investors play defensively or with high beta over the next six to 12 months?
Over the past two months, we have shifted our portfolio toward a high allocation to large caps. Sector-wise, we have increased our weighting in the telecom, pharmaceutical and consumer sectors. In terms of style, we paid more attention to quality versus value. Investors may consider choosing investments that focus on defensive growth.
Q) What asset allocation would you recommend to new investors with high risk appetite and moderate risk appetite in this market?
Any new investor entering the markets now should think about a long-term investment horizon for investing. When planning investments, don’t just rely on last year’s returns.
Consider data on longer-term returns and volatility across asset classes and then set expectations. Use a systematic investment plan (SIP) or a systematic transfer plan (STP) with the aim of taking advantage of volatility. Think contrarianly and consider investments that have good long-term prospects but are experiencing short-term problems.
First publication: Oct 9, 2024 | 1:19 PM IST