'Investors need to expect steady returns over the next one to two years with bouts of high volatility.'
While valuations have improved, following a sharp correction in the market and intense volatility as central banks tighten monetary policy, Manish Gunwani, chief investment officer for equity investments at the Nippon India Mutual Fund, in a conversation with Chirag Madia/Business Standard, spells out key issues foreign investors are facing when it comes to allocating capital to India.
What, according to you, is the key source of volatility we are witnessing right now?
For the most of the past decade, markets have benefited from low-interest rates, which were dependent on inflation remaining low.
In the past year, inflation has shot up beyond expectations of most people and major central banks have been forced to change their stance to tighten monetary policy.
While global growth remains reasonably healthy, this has contributed to increased volatility.
Have valuations turned attractive, following correction?
The recent correction has improved market valuations, but overall, we believe investors need to expect steady returns over the next one to two years with bouts of high volatility.
Globally, inflation remains a key challenge, necessitating a monetary policy tightening.
Given strong returns over the past two years, it is likely that the market may be in consolidation mode for some time.
What are some of the biggest headwinds for the market?
The biggest headwind globally is high inflation caused by low investment in the past few years, geopolitical issues, and supply-chain constraints.
This is leading to a rapid tightening in monetary policy.
The strength of the US dollar has further contributed to tighter liquidity.
On the domestic side, we are yet to witness a rebound in mass consumption segments like fast-moving consumer goods and two-wheeler.
For India, the steep rise in energy prices also poses a stiff challenge.
What are the key takeaways from the January-March quarter earnings season?
As expected, high commodity prices have put a fair degree of pressure on the margins of companies in segments like consumer goods, pharmaceutical, and automotive.
The asset quality for banks has continued to improve, leading to healthy profits.
Overall, the broad earnings positive surprises we saw in the past few quarters have moderated somewhat.
What are your views on foreign flows? Do you think domestic players can continue to counterbalance outflows from overseas funds?
Foreign investors are currently facing some issues in terms of allocating capital to India.
There are commodity-exporting countries within emerging markets whose fundamentals have improved due to a boom in commodity prices.
This is hurting India's relative preference.
Tightening monetary policy and a strong dollar are reducing liquidity globally.
Even among Asian currencies, the Indian rupee has done well, making foreign investors cautious.
Also, the China market has underperformed a great deal and it has a big weight on EM indices.
Some capital is flowing there rather than in India.
Is there enough opportunity to deploy fresh capital? Have cash levels gone up?
From a two- to three-year perspective, the market looks reasonably rewarding after the recent correction.
Most of our funds are benchmark-oriented and we generally don't believe in high cash levels in such funds.
Hence, there has not been too much change in our cash levels.
Which segments of the markets are you staying away from and why? What's the strategy to generate alpha?
We believe in an environment where there is high inflation, uncertainty on growth, tightening liquidity, and value stocks outperforming -- essentially stocks that are cheap on earnings, book value, replacement cost, etc.
Now with a fairly sharp correction in many growth stocks, the risk-reward has improved significantly, but we still believe that value-oriented stocks are a better bet.
What strategy should investors adopt at this point in time?
There is no substitute for disciplined asset allocation.
Given the expectation of high volatility, continuing dynamic asset allocation products like balanced advantage funds are a good option.
Feature Presentation: Aslam Hunani/Rediff.com
