We are not increasing allocation to cash, says Prasun Gajri, CIO, HDFC Life

Prasun Gajri says that while valuations are on the higher side, market correction is likely to be triggered only by a liquidity reversal, driven by global events or any dent in earnings expectations.

With the markets trading near record high levels, PRASUN GAJRI, chief investment officer at HDFC Life, tells Puneet Wadhwa in an interview that while valuations are on the higher side, market correction is likely to be triggered only by a liquidity reversal, driven by global events or any dent in the earnings expectations that are already built-in. Edited excerpts:
 

What is your outlook for the markets for the remaining part of 2021?
 

We are long-term investors and are not focused much on the short-term market movements. Currently, the market is trading at a new high and valuations are above long-term averages, which has investors worried about a correction. At the same time, the market has been supported by strong earnings upgrades over the last three quarters and earnings expectations over fiscal 2021-22 (FY22) and FY23 remain robust. While valuations are on the higher side, market correction is likely to be triggered only by a liquidity reversal, driven by global events or any dent in the earnings expectations that are already built-in. Instead of trying to predict the correction, it will be better to get a little cautious in the portfolio construct compared to the last six months.

Do you see the markets becoming more polarised in the next few months?

Markets have been polarised at a sectoral level for some time now, with different sectors leading the market at different time periods. This trend is likely to continue. As an example, we are already seeing some indications of the consumer staples sector performing for the last month or so after lagging the market over the last 9-12 months. At the same time some of the sectors that have been doing well are taking a breather. It is not possible to chase the next performing sector at all times. Our focus is to construct a balanced portfolio across sectors and stocks that can perform over a medium-to-long term.

Are retail investors still looking to dabble in the markets directly?

Based on the available data, the domestic liquidity continues to be good. While the equity flows to mutual funds (MF's) have slowed in August in comparison to July, the flows have been positive every month during the current fiscal. Flows to the debt funds are also picking up. Some of the new fund offers (NFOs) have also done quite well. As regards retail participation, the trend of new investment accounts being opened remains strong, thus indicating that retail investors continue to participate directly as well.

Have you increased your allocation to cash in your portfolio?

We are not increasing allocation to cash, as we do not believe that is the correct strategy. Instead, we continue to re-balance our portfolios and at the margin have got more cautious. We are balancing out our cyclical exposures with allocation to defensive sectors as well. Moreover, we are focusing mostly on large-cap stocks in our diversified portfolios given that mid-caps are trading at a premium. Remain overweight on private banks, cement, capital goods on one hand, and remain positive on information technology (IT) and pharma sectors.

What is your view on the auto sector?

The auto sector is going through a challenging time and there are structural changes also underway, especially in the two-wheeler space. The transition to electric vehicles (EVs) in two-wheelers is challenging the incumbents. It remains to be seen how they respond going forward and the impact the transition has on their growth and margins. The four-wheeler space is facing supply constraints owing to the global chip shortage. On the demand side, the festive season is around the corner, but the supply constraints will remain a worry for the four-wheelers. There are opportunities, especially in the four-wheeler space, as the stocks have corrected. Once the chip shortage issues are behind us, pent up demand could trigger a growth cycle.