Markets still offer opportunities for long-term investors: Experts at BFSI

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

The 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 returns expectations were the key takeaways from a panel discussion involving the country’s leading money managers.

Speaking at the Business Standard BFSI Insight Summit on Mutual Funds, Prashant Jain, chief investment officer (CIO) at HDFC Asset Management Company (AMC) said, “I would agree that there are pockets of exuberance but don’t think it can be said for the entire equity markets. The bulk of returns over the next few years would be made from earnings growth and not from (further) valuation expansion.”

In the last one year, the BSE Sensex has climbed 44 per cent, while midcap and smallcap indices have surged 72 per cent and 93 per cent, respectively. This has pushed up price-to-earnings (P/E) valuations above historical averages. Despite that, the market still offers opportunities, the top money managers said.

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

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Surana said investors should come with a three-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 post-pandemic stimulus measures taken by global central banks. With the threat of inflation looming large, many of these measures are now being unwound. The market experts said, investors will take cues from what central bankers decide.

S Naren, executive director & CIO at ICICI Prudential AMC said, “I think the entire lever is with global central banks as they have pumped in $25 trillion into the market. So, I think the key is going to depend on what they want to do. Having said that, the corporate sector has deleverage, fiscal deficit numbers are very good.”

“The reality is that central banks world over have realised that excess liquidity must normalise. The wheel has begun to spin. The easy money and low rates can no longer twin, so the gradual unwind is on the way,” added Lakshmi Iyer, CIO (Fixed Income) & Head - Products at Kotak Mahindra Asset Management Company.

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

Manish Gunwani, CIO - Equity Investments at Nippon India Mutual Fund said, “The biggest chance of equity facing a big downside is a commodity super cycle not led by demand which we saw in 2000 because of China’s growth but just because of asset inflation.”

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

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

Rajeev Thakkar, CIO, PPFAS Mutual Fund said, “In equities, there are pockets where a serious amount of money is going to be lost and especially in the frothy space where the 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,” he added.

Gunwani sees value in domestic cyclicals, which includes banks, NBFCs, cement, real estate. “Only disclaimer I will give is that the moment the current account deficit goes above 3 per cent you have to change your stance,” he said.

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

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

“We are at a stage right now where credit spreads have compressed. So it is not a screaming buy but yes 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.

Thakkar said if we want MSMEs to grow we need to find some solutions for credit events or ratings downgrades.

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