Most investors expect a market correction: Naveen Kulkarni, Axis Securities

Market's focus has shifted to corporate earnings' growth, backed by comfort in valuations, says Naveen Kulkarni, chief investment officer at Axis Securities.

The up move in the market came to a grinding halt post Infosys' June 2023 quarter results last week. NAVEEN KULKARNI, chief investment officer at Axis Securities PMS, tells Puneet Wadhwa in an email interview that the market is ignoring serious risks that have a decent probability of materialising. Edited excerpts:

Has the sharp up move in the markets in the last few weeks taken you by surprise?

The up-move was not surprising, but the movement has been sharper than our expectations. This generally happens in equity markets as these swings are more-than-expected. In the last year, market valuations were reasonable, and we assessed that risk-taking will be rewarded whenever the upswing happens. This strategy has worked well for us.

Now, valuations have moved up, and corporate earnings over the next 12 months must justify these valuations. Thus, the market’s focus has clearly shifted to corporate earnings’ growth, backed by comfort in valuations. In this scenario, our strategy is shifting towards growth at a reasonable price (GARP) from the earlier stance of value backed by quality.

A number of MF schemes have closed the investment window in the small-cap category. How are you dealing with this as a PMS fund manager?

Mutual Funds are seeing a higher allocation towards small-cap schemes, whereas large-cap schemes could have been more exciting. As a PMS fund manager, this is definitely a tailwind as PMS strategies inherently are risk seekers with a tilt towards small and mid-cap schemes.

In this market where large allocation is happening from MFs towards small cap stocks, PMS schemes will do well as they are already focused towards small cap investments. Yes, investment-worthy options have reduced compared to around six months ago. Still, there are good options with solid earnings growth profiles across sectors which can create sustainable long-term returns.

Is the risk-reward still favourable for investing in equities?

The risk-reward is not unfavourable at the current juncture, but definitely not highly favourable. Most investors expect a market correction, but it has not been happening due to consistent inflows from the foreign institutional investors (FIIs). Thus, some correction in the market could happen, but it may not be very significant. Therefore, investors willing to sacrifice some upside and looking at 10-12 per cent returns over the next 12 months can still look at investing, as timing the market has become difficult in this environment.

While the chances of significant correction are low, the market is exposed to political risks over the next 12 months. Also, the chances of global recession have been largely ignored now. Thus, the market is ignoring serious risks that have a decent probability of materialising.

What have been the hits and misses as regards the June 2023 quarter results season?

June 2023 result season has been a mixed bag. TCS' results were not bad, but Infosys was a serious miss. Hindustan Unilever limited (HUL) results missed the mark, but operating performance was decent. HDFC Bank's results were good. Overall, the result season has been a mixed bag, with misses being more significant than beats.

Can you elaborate on your views on the information technology (IT) and the banking sectors?

IT stocks are impacted by global challenges and see impact with a lag. As of now, FY24 is a challenging year for the IT sector. We have maintained an underweight stance on the sector, and this will likely continue for some more. The banking sector is still performing well, and there is no need to tweak allocation from Banking to IT. However, some adjustments within the BFSI sector can be made, like focusing on smaller banks or NBFCs, depending on case by case basis.

What are you advising your PMS clients now in terms of an investment strategy for the next year?

Our focus now is looking for companies with sustainability earnings and GARP. Also, the focus on mid-and small-caps will continue over the medium-term. To some extent, returns have been front-loaded in FY24, but to sustain the returns, companies will have to deliver on operating performance. Thus, the strategy is to manage tail risk better while managing portfolio earnings growth.