Expect Nifty50 earnings growth of 28% for FY22: Kalpen Parekh

This is a good time to rebalance asset allocation, Parekh said

At the current levels, the markets are banking on fiscal 2022-23 (FY23) earnings numbers to a large extent, feels KALPEN PAREKH, president, DSP Investment Managers. This is a good time for investors to rebalance asset allocation, he tells Puneet Wadhwa in an interview. Edited excerpts:

Do you see risks to the downside for the markets intensifying in the months ahead?

Interest rates – globally and in India – have reversed a bit since their all-time lows. To get back to high growth phase, we expect the government to spend more. That requires very large deficits and borrowing via bonds. If interest rates rise sharply, our valuations can come down. Global flows slowing down is a key risk for our markets. At the current levels, the markets are banking on fiscal 2022-23 (FY23) earnings numbers to a large extent. Hence, any moderation in earnings outlook due to rising input prices would be taken negatively by the markets.

Do you see a fresh wave of selling in case earnings fall short of expectations?

Input and raw material costs across many industries have risen. Many of these price rises, especially commodities, are due to supply constraints and not strong durable demand. If companies can’t pass on these input costs rising to end customers, their margins would reduce. In cases where companies pass on input costs to their customers, demand could slowdown. We would wait to see how sustainable the recent demand growth is. If not, earnings can slow down and lead to market correction, which are priced to perfection. Based on internal analyst estimates, we expect Nifty50 earnings growth of 28 per cent for FY22.

What has been your investment strategy thus far in 2021?

The portfolio approach is more aligned to long-term investment outlook, which is driven by secular growth businesses generating positive cash flows and superior return on equities (ROEs). With that background, we hold a positive view on private sector banks, non-bank finance companies (NBFCs), healthcare, cement, Consumer discretionary and select non-discretionary companies. We have also started looking at few capital good companies, as we see them benefiting due to a revival in capex momentum. In a majority of our equity strategies, we are currently underweight on power utilities, oil marketing companies (OMCs) and metals.

Equity mutual funds have seen an outflow for the eighth consecutive month in February. Do you see the trend reversing anytime soon?

Flows are always cyclical. More so, after phases of sharp fall (2020) and equally sharp recoveries. Investors don’t like volatility naturally, and such sharp moves trigger profit booking at higher prices. This trend could continue – though after many months, March has seen positive flows.

So, what’s your advice to investors?

This is a good time to rebalance asset allocation. Investors who feel nervous at higher valuations should not exit equities and give up on long-term compounding. Instead, they can shift to dynamic asset allocation funds to automatically rebalance their equity exposure. At the current juncture, increasing allocation to equities should be purely a function of time horizon – investing for over 7 years.

Sentiment on debt funds have suffered after the wind-up of certain schemes. Besides, key macro variables have kept investors at bay. What's your view here?

When rates are very low, we generally don’t lock our money for the long-term. Using the same principle, a good product segment for debt investors would be shorter maturity funds (4 years) managed with daily reducing maturity. These are called roll down funds, which invest in high quality corporate bonds. The concept of roll down reduces fluctuations due to any future rise in interest rates and helps lock higher interest rates at the right time.