'2022 has not been -- and will not be -- the kind of 2021 bull market, which lifted all boats.'
Devina Mehra, founder, chairperson and managing director, First Global, and India and Global Quant Asset Manager, explains why she expects India to be an outperformer amid volatility in global equity markets in an interview with Puneet Wadhwa/Business Standard.
Do you think the up-move in global equity markets, including India, since June was a bear market rally?
I have been saying from the beginning of the year that India will be an outperformer this year and that has panned out in spite of the currency depreciation.
I expect this to continue. India will remain one of the stronger markets.
For context, in mid-June, I had said that it was time to be invested in the markets, otherwise the risk of missing out on a big up-move was very real.
The Indian market went up 18 per cent from there in little over two months.
For India, the move hardly qualifies as a bear market territory in the first place.
In India, while I expect volatility, a big downside from here is unlikely.
Globally, the turmoil in Europe will continue, driven primarily by uncertainty on energy issues.
As regards the US, a lot of the pain is already in the price, especially in the non-tech space.
While the US may not outperform the way it did in the past decade, reasonable stability appears to be on the cards.
In any case, usually, whether something is a bull market or bear market rally is evident often only in the hindsight.
Is risk-reward still favourable for equities as an asset class over the next year?
Yes, I still favour equities as risk-reward is most favourable for the equity markets after such a correction.
In the global context, past data suggests that every time the market has been down so much for the year, there is a high likelihood of a rally thereafter.
In any case, this has been one of the unusual times when almost all asset classes and almost all countries, barring a handful of commodity-related markets, have declined for the first nine months of the year.
Given the rate tightening, fixed income has also not been a good place to be globally, with all fixed income indices going down substantially.
Commodities have given up their gains for the year, with finally even oil coming down to January levels.
However, part of this is only the dollar appreciation as prices are quoted in US dollars; commodity prices have gone up in other currencies.
The best place to be in this year has been the US dollar itself, which is up 19 per cent on average against other currencies, and still not showing signs of weakness.
Would you prefer large-, mid-, or small-caps from a 12-month perspective?
In India, I expect mid- and-small caps to give higher returns than large-caps, although large-caps will be more stable and less volatile.
Nevertheless, in our PMS schemes, we limit small-cap exposure simply as a risk management parameter as liquidity can disappear in these very quickly on the way down.
Having said that, 2022 has not been -- and will not be -- the kind of 2021 bull market, which lifted all boats.
This is the year to pick and choose sectors and companies carefully.
From a short-term perspective, do you think risks for the markets are mounting and rallies will eventually get sold?
We are near the bottom in the US, although some European and emerging markets may have different dynamics.
However, the equity markets will still be volatile and it may take another quarter for stability to return for global markets.
For India, I believe the worst, which itself hasn't been so bad, is behind.
In any case, all academic studies across multiple countries show that sentiment is a contra indicator for future returns.
When sentiment is poor, returns in the next period are above average and when sentiment is at a high, as it was in 2021, the next period returns are below average.
What has been your investment strategy at First Global in this rising interest rate and inflationary backdrop?
We have been cognizant of the fact that this year there will be a rising rates environment, and particularly in the West, where rates are coming off near zero, the percentage change is very substantial.
Unfortunately, globally, almost all asset classes and all geographies have seen a decline this year -- leaving little room for long-only strategies.
As I have been saying from the beginning of the year, India looked like an outperformer.
Even in our global funds we have had our highest-ever weighting to India.
Over the next few months and quarters, I expect India to be an outperformer globally and in absolute terms.
I do not see a very significant downside from here, although some volatility is to be expected.
Do you see earnings downgrades over the next couple of quarters as input costs bite?
I do not see margin compression as a significant risk area going forward.
In fact, you may well see some margin expansion at least compared to the past two quarters.
Sectoral trends will be divergent, with certain segments like capital goods and banking showing better results.
On the demand side, while there is a definite revival from the sluggish conditions of the past two years, various segments of the economy are growing at a different pace, with still many citizens below the creamy layer continuing to hurt.
Still, even on this front, things are better than what they were a couple of quarters ago -- showing in a host of indicators from better job growth to two-wheeler sales.
Feature Presentation: Aslam Hunani/Rediff.com
