Cut your near-term expectations from equities; Fed may go for a rate cut in early 2024, says Ajay Tyagi of UTI AMC
Indian stock market valuations are currently higher than usual, indicating a potential correction. Short-term investors should lower expectations, while long-term investors should stick with regular investments, said Ajay Tyagi of UTI AMC.
The valuations of the Indian stock market are currently higher than they usually are in the long run. This means there might be a correction soon. If you're thinking about investing in stocks in the short term, it's a good idea to lower your expectations. However, if you're planning to invest for the long term, sticking with your regular investments (SIPs) is still a good choice, said Ajay Tyagi, the head of equity and fund manager at UTI AMC. In an interview with Mint, Tyagi talked about which sectors can perform better going ahead and what is the road ahead for mid and small-caps.
Edited excerpts:
Are you concerned about the poor monsoon, next year's general elections and sticky inflation? Is it time to cut our expectations from equities?
Monsoons in August have been the worst in a century and as a result, the overall rains for this year would be sub-optimal. This may lead to concerns around food inflation and thereby delay reduction in policy rates.
General elections can of course lead to near-term uncertainty and have a sentimental impact in the short term, although from a medium to long-term perspective the fundamentals of the Indian economy are not contingent on which party forms the government at the center.
The valuations for the Indian markets are higher than the long-term averages and therefore a correction cannot be ruled out.
From a near-term perspective, it would be prudent to cut our expectations from equities although for long-term investors continuing with their SIPs is the best option.
Why is inflation not coming down sustainably despite aggressive rate hikes? How should we invest in a high-inflation environment?
Inflation has been coming down in the US slowly yet steadily. The underlying strength in the economy is preventing inflation from collapsing but we are getting close to the target levels with each passing month.
As far as investing in a high-inflation environment is concerned, the best hedge against inflation will eventually be companies that have pricing power and can therefore pass on the rising input costs to the consumers and still retain their margins.
For such companies, inflation is not a headwind but a tailwind as price increases add to their profit growth beyond the usual volume-led growth.
When do you expect the Fed and the RBI to think about cutting rates? Do you expect a hike in policy rates in the near future?
While the current inflation in the US is still higher than the Fed's target of 2 per cent, both on account of base effect as well as a slowdown in growth, it is just a matter of time before inflation comes within the comfort zone.
The probability of the Fed increasing rates beyond 25 bps is low, on the contrary, we feel sometime in early 2024 Fed will start to reduce interest rates as economic data becomes more supportive.
As interest rates start to come down in the US, RBI too will have elbow room to reduce rates in 2024.
Should we focus on value stocks or growth stocks at this time?
Often growth and value styles alternate in the market. Over the last three years, value stocks have done significantly better than growth stocks. While the outperformance of value stocks had started in 2020 itself, it was exacerbated by the steep rise in interest rates through 2022.
With peak rates in sight as well as the outperformance of value versus growth at the highest level in terms of duration and magnitude, we feel the time for reversal is ripe.
Which sectors of the market look attractive to you at this juncture? Given the uncertainty, would you recommend sticking to defensives only?
With the global economic environment expected to remain weak, sectors that have global linkages appear to be unattractive to us.
Across all the major regions like the US, Europe and China, growth rates will remain weak in the coming quarters and this would be negative for sectors like energy, metals, chemicals, etc.
On the other hand, India’s growth will remain secular and therefore sectors that are linked to domestic consumption like banking and financial services, consumer staples, consumer discretionary and healthcare should continue to do well.
At this juncture, given that there is uncertainty on account of multiple global issues, it is better to stick with companies that can show structural growth.
Mid and small-caps are stealing the limelight. Why are they outperforming? Can they sustain the gains?
Usually, when a segment of the market starts to perform well, it gains momentum and witnesses capital chasing it. The amount of flows into small-caps and mid-caps has been very high over the last few quarters and that is a big reason for the outperformance.
However, one needs to be cautious here as valuations have run up significantly. Both the mid-cap and small-cap indices are trading around 40 per cent higher than their long-term averages.
As compared to this, the large-cap index is trading at less than a 20 per cent premium to long-term averages. The overvaluation in mid and small-caps is also clearly evident in the premium at which they are trading to the large-caps.
What should be the strategy for picking a quality stock? What factors should retail investors keep in mind before picking a stock for investment?
Retail investors should first invest only in those businesses that they understand well. Investing in stocks or sectors that are witnessing momentum or have become fads is a very dangerous strategy. Any investment made without understanding the long-term drivers of a business and its sustainability is not an investment but speculation.
Investors should consider factors like return on capital (RoCE), and return on equity (RoE) of a business which are measures of profitability, cash flow generation which is a measure of being self-sufficient for future growth, the level of debt on the balance sheet which is a measure of strength and the resilience of a business and last but not least, management quality and governance track record.
Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.
The views expressed are those of the expert and not necessarily those of UTI Asset Management Company Limited. The views are not investment advice and investors should obtain their own independent advice before making a decision to invest in any asset class or instruments. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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