Good time to enter market with long-term horizon, say money managers

Leading money managers also warn of risks emanating from external factors, besides frothy valuations in certain pockets in the domestic market

A sharp surge in stocks and expensive valuations notwithstanding, this could still be a good time to enter the market with a long-term investment horizon and moderate return expectations. These were some of the key takeaways from a panel discussion that saw the country’s leading money managers put their heads together.

Speaking at the Business Standard BFSI Insight Summit on mutual funds (MFs), Prashant Jain, chief investment officer (CIO) at HDFC Asset Management Company (AMC), said, “There are clusters of exuberance. But I don’t think it can be said for the entire equity market. The bulk of returns over the next few years would be made from earnings growth, not from (further) valuation expansion.”

In the past one year, the BSE Sensex has climbed 44 per cent, while mid-cap and small-cap indices have surged 72 per cent and 93 per cent, respectively. This has pushed up the price-to-earnings valuation above the historical average. Regardless, the market still offers opportunities, said the top money managers.

“I would be in the ‘buy’ camp within well-defined asset allocation. Our view on equity is constructive. It comes from the fact that the earnings outlook has improved significantly and the cost of capital is low,” said Neelesh Surana, CIO, Mirae Asset Investment Managers.

Surana said investors should come with a three to five years investment horizon and with expectation of 10-12 per cent sort of returns.

The gains in the market over the past one year have been propelled by pandemic stimulus measures taken by global central banks. With the threat of inflation looming large, many of these measures are now being unspooled. The market experts said investors will take cue from what the central bankers decide.

Sankaran Naren, executive director and CIO at ICICI Prudential AMC, said, “I think the entire lever is with global central banks since they have pumped $25 trillion into the market. The key is going to depend upon what they want to do. Having said that, the corporate sector has deleveraged. Fiscal deficit numbers are very good.”

“The reality is that central banks the world over have realised that excess liquidity must normalise. The wheel has begun to turn,” said Lakshmi Iyer, CIO (fixed income) and head-products, Kotak Mahindra AMC.

Some, however, believe policy normalisation may still not be the biggest risk for markets.

Manish Gunwani, CIO-equity investments at Nippon India MF, said, “The biggest chance of equity facing a big downside is a commodity supercycle, not led by demand we witnessed in 2000 because of China’s growth, but because of asset inflation.”

The buoyancy in the secondary market has led to record mobilisation through initial public offerings (IPOs) this year, with several start-ups making a beeline to list.

Fund managers believe valuations of certain companies in this space are excessively high and one should avoid them.

Rajeev Thakkar, CIO, PPFAS MF, said, “In equities, there are areas where a serious amount of money is going to be lost, especially in the frothy space, where companies are coming out with IPOs.”

“In order to justify the pricing, one has to look two or three decades ahead. I think some serious money could be lost in that space. At the same time, there are pockets that can be safely held. There are pockets where one can buy,” added Thakkar.

Gunwani sees value in domestic cyclicals, which include banks, non-banking financial companies, cement, and real estate. “The only rider is that the moment the current account deficit goes above 3 per cent, you have to change your stance,” he said.

On the debt MF side, market mavens believe the worst could be behind us.

“I would say that the worst for the credit market is behind us. However, there is just too much exuberance in companies in the new-age space on the equity side. The risks are today in IPO markets, not in credit markets,” said Naren.

“We are at a stage right now where credit spreads have compressed. It is not a screaming buy, but there is a small spread that exists which can be captured now,” said Iyer.

Fund managers also say to deepen the debt market in the country, one has to go beyond the top-quality papers.

“If we want micro, small and medium enterprises to grow, we need to find some solutions for credit events or rating downgrades,” said Thakkar.

Jain of HDFC AMC said, “We need to watch out for India’s inclusion in the global bond indices since it could have a significant impact on domestic interest rates.”