'Room for more correction in equities'

'At current valuations, we believe large-caps offer better downside support.'
'Hence, we are suggesting a small tilt towards them.'

The recent pullback in the market can hardly be called a correction and valuations remain high, says Harsha Upadhyaya, chief investment officer - equity, president, Kotak Mahindra Asset Management Company.

In an interview with Chirag Madia, Upadhyaya says investors should use volatility to build a long-term portfolio.

Have valuations turned attractive after the latest pullback?

Domestic equities have seen more time correction than value correction in the last few weeks. Earnings estimates for financial year 2021-2022 (FY22) and FY23 have remained broadly unchanged, while the market is down only 5 per cent from its peak.

Nifty is currently trading at about 20 times its estimated earnings for FY23, which is higher than the historical long-period average.

Do you think the correction could extend?

The recent pullback can hardly be called a correction. Indian equities have been on one of the strongest rallies in history, with large, mid, and small-cap indices generating returns of 64 per cent, 94 per cent, and 104 per cent, respectively, without even a 10 per cent correction from the peak.

If profit booking continues with increasing global concerns, there is room for further correction in Indian equities -- either time-wise or value-wise, or both.

Do you expect the selling by foreign investors to continue?

We have witnessed net selling by foreign portfolio investors (FPIs) of nearly $4.5 billion in the current quarter already.

The impending taper by the US Federal Reserve (US Fed) is also perhaps a reason for this action, along with valuation richness and relative outperformance against other emerging markets (EMs). This may continue for a while.

What are the biggest risks for the equity markets at this point?

The impending US Fed taper programme and strengthening of the dollar leading to possible liquidity pull out from EMs.

Commodity cost pressures impacting corporate profitability at a time when demand is just beginning to stabilise.

Possibility of further disruption in economic activities due another wave of Covid. And, of course, elevated valuations are some risks.

How do you see the relationship between bond yields and market playing out?

The US 10-year treasury yields have steadily firmed up to around 1.5 per cent in anticipation of the taper and likely reversal in interest rate cycle.

Higher interest rates will adversely impact corporate profitability and suppress equity valuations.

Do you see more comfort in large-caps or the broader markets?

Yes, over the past 18 months or so we have seen mid, small-cap stocks outperforming large-caps by a large margin -- about 1.5-2 times.

At current valuations, we believe large-caps offer better downside support. Hence, we are suggesting a small tilt towards them.