I do not see any significant downside to markets, says Vikas Khemani

"The Indian economy is far more insulated and better placed than most global markets", says Khemani

Markets have started to cut their losses as foreign investor flows have started to trickle in. Vikas Khemani, founder, Carnelian Capital Advisors, in conversation with Puneet Wadhwa says India – and equity as an asset class – offers one of the best risk/reward profiles. He sees a massive wealth creation cycle ahead. His advice: do not focus on short-term noise. Edited excerpts:

How vulnerable are global equity markets to a meaningful correction? Is the worst of inflation, geopolitical risk, and commodity price rise behind us?

I think the peak of inflation and commodity price rise is behind us, except for any further geopolitical escalation, which is impossible to predict. As the US Federal Reserve (Fed) unwinds its balance sheet, liquidity will tighten further. We will see global growth slowing down. The narrative will soon shift from inflation to growth.

What about Indian equities? Do you see a period of consolidation over the next few quarters as they digest the impact of global cues?

The Indian economy is far more insulated and better placed than most global markets. Our growth continues to accelerate, backed by the investment cycle, manufacturing renaissance, strong information technology (IT) sector, and strong consumption.

We are in a virtuous cycle of growth, amplified by a supportive policy environment. Incremental job creation across the board is a significant positive. Our inflation worry is not very high. I do not see any significant downside to the markets.

The Reserve Bank of India (RBI) expects growth to slow as it hikes rates. Isn’t that contrary to your expectation that growth will accelerate, backed by an investment cycle?

The RBI is very conscious and has articulated that it wants to support growth and still manage inflation. The central bank has always been supportive of growth. Recent hikes won’t have much impact on growth.

Demand destruction as a result of high commodity prices is far more than the interest cost companies will have to pay in case of rate hikes. As commodity prices cool off, most growth concerns will start receding.   

Is the risk/reward favourable to retail investors to buy stocks at current levels?

Today, India – and equity as an asset class – offers one of the best risk/reward profiles. I see a massive wealth creation cycle ahead of us. My advice is not to focus on short-term noise.

What has been your strategy at Carnelian Capital amid recent market corrections? How much cash are you sitting on?

We were sitting on some cash and have been deploying capital through the fall. We have added banking, automotive, capital goods, and manufacturing plays.

What’s your interpretation of the first quarter of 2022-23 results India Inc has announced thus far?

Most corporations across sectors so far have reported robust earnings growth. I see no major negative change in that. Some amount of tapering off is possible in some sectors due to slowdown in global growth, but that will be limited to some sectors.

Foreign investor flows have started to trickle in. Will the momentum sustain? Which stocks/sectors will foreign investors chase if they were to return to Indian shores?

Foreign portfolio flows are strongly linked to the Fed rate cycle. Whenever the Fed looks to raise rates, emerging markets see an outflow. This trend reverses once the rate cycle is over. As the rate cycle nears its peak, I see this reversing soon. Calendar year 2023 will be a big year for foreign portfolio investor flows, and will surprise everyone.

Does it make sense to diversify into foreign markets in this choppy phase?

India is the best equity market across the globe. If someone wants to do it purely from a diversification perspective, that’s entirely different. I see no reason why Indian equity markets should underperform.

India offers a wide range of opportunities. Manufacturing is one big theme that will play out just like the IT sector did 25 years ago. We are where China was in the early 2000s and will see a massive opportunity in the space, which cuts across both import substitution and export. We, at Carnelian Capital, have a dedicated fund capturing this opportunity.

What will your advice be to someone who wants to start building an equity portfolio?

It is never too late. Start today and you will create massive wealth as we are in one of the best phases for doing just that. One should look to invest in stocks of structurally large companies that are run by good management teams. Mid-caps and small-caps tend to do well in such a phase, but one should always take a balanced approach depending on the risk appetite.