Expecting daily positive moves in stock market is unreasonable: Parekh

Valuations are high in companies in defense, railways, engineering, new energy, and the power sectors, Parekh of DSP Mutual Fund said in an exclusive interview

It has been an uphill task for the frontline indices to cling on to the higher levels amid domestic and global developments. KALPEN PAREKH, MD and CEO of DSP Mutual Fund, tells Puneet Wadhwa in an email interview that for very long-term investors, it has been best to not make any changes in their  mutual fund portfolio just because of changes in macro factors. Edited excerpts:

Lok Sabha 2024 elections have triggered market volatility. How are your fund managers navigating this uncertain phase?

We must recognise the natural order of prices is to fluctuate always and expecting daily positive moves in the stock market is unreasonable.

The intrinsic value of businesses remains relatively stable compared to their market prices and some sectors are consolidating and some hitting new highs. We leverage these disparities to identify arbitrage opportunities, aiming to capitalise on the convergence of market prices with fundamental business value over the medium-to-long term.

We build balanced portfolios across sectors with momentum, such as automotive, power, defense, railways, and housing, at the same time own large positions in sectors having more reasonable valuations, such as banking and insurance. We are also exploring sectors undergoing cyclical turnarounds, such as consumer goods and specialty chemicals.

Has picking investable stocks and themes in the markets and alpha generation become more challenging now?

Our large-cap, diversified, focused and thematic funds have earned better than index returns over the last two years. We are witnessing large flows creating tailwinds for prices to rise amid the other geopolitical uncertainties in many parts of the world. Flows also have made valuations high. We try to stay focussed on companies’ fundamentals and stick to sound principles of investing in good companies at right prices.

How comfortable are you with the market valuation at this stage?

Valuations are high in companies in defense, railways, engineering, new energy, and the power sectors. A mix of stories, improvement in profits and flows chasing stocks is increasing the valuation risk here. In these sectors, it’s more important now to be sure about return on equity (ROE) and cash flows and not just future prospects based on narratives.

On the other hand, the largest index weight - banks - have seen prices fall or stagnate despite good fundamentals. We feel comfortable investing here as valuation comfort is high. Small-and mid-cap companies have seen decent growth and an indecent amount of flows, making valuations expensive. We feel comfortable to recommend investing via staggered investments and systematic investment plans (SIPs).

How should retail investors rebalance their MF portfolios?

In India, due to better management of inflation, deficits and demand for Indian bonds improving – we have increased duration in our debt funds - thus signaling these are good rates to invest at and we expect rates to stay stable or fall. Global economies remain highly leveraged and will need to service this debt at higher rates than two years back. These rates have also been volatile sharply in both directions. Central banks are adding gold aggressively. Valuations have not fallen to adjust to higher cost of capital around the world.

With that backdrop, it would be prudent to be conservative. If you need money and are closer to achieving your goals, take advantage of higher stock prices. If you don’t need money, do nothing but at the same moderate your return expectations. Dial down risk one notch by investing in hybrid categories. However, for very long-term investors, it has been best to not make any changes in their portfolio just because of changes in macro factors.