"We expect the June and September quarters to be soft. We may continue to see volatility in the markets at least in the short term," Harsha Upadhyaya, President & Chief Investment Officer – Equity, at Kotak Mahindra Asset Management Company, told Moneycontrol in an interview.
Kotak would therefore like to utilise these bouts of expected volatility in the markets to gradually invest further in the markets, he added. Edited excerpts:
Do you think the consistent consolidation and possibility of another round of major market corrections in the coming months can spoil the mood of domestic institutional investors and retail investors, who have played a major role in supporting the market when FIIs have been aggressive sellers?
The domestic investor base participating through mutual funds has witnessed consistent growth over the years and we believe this is a mature lot now. SIP monthly inflows into mutual funds have crossed Rs 12,000 crore and total SIP folios are currently at over 5.5 crore. This shows the clear change in investor behaviour in favour of regular and long-term investing.
While short-term market fluctuations could affect investor sentiment to an extent, we believe it is unlikely to dent the overall trend in a significant manner.
Do you think recession fears, rate hikes, inflation concerns and geopolitical tensions are the real reasons forcing FIIs to pull out a significant chunk of money from India since October 2021? Also do you think FIIs will keenly watch the general elections of 2024 before turning aggressive buyers in India?
There is still time for the next general elections — I do not think that it is driving investor behaviour at the moment. The recent spate of FII selling is primarily driven by redemptions witnessed by them in their emerging market (EM) funds on worsening macro conditions.
India's premium valuations compared to other EMs has also led to profit booking in Indian equities. We do not think that FII flows have turned negative on India-specific negatives but mostly due to worsening macros and the relative outperformance of India versus EMs in the recent past.
After the recent correction, are there any themes that you are buying into aggressively?
We expect the June and September quarters to be soft. We may continue to see volatility in the markets at least in the short term. We would like to utilise bouts of expected volatility in the markets to gradually invest further in the markets. We are still looking for stock-specific opportunities across sectors rather than focusing on top-down themes/ sectors.
Do you think the market hit the bottom in June and are waiting for a trigger to see a sharp upmove or are we yet to see the bottom?
It is always difficult to predict short-term market movements. While a significant amount of froth in valuations has corrected since the October 2021 peak, overall valuations have just entered the fair range on a long-term basis.
However, this is based on current estimates of corporate earnings growth. Therefore, if we witness any earnings disappointments that are not priced in by the market, we could continue to witness volatility.
Is there a possibility of another round of corrections in the metals sector stocks before any bottom formation, considering the current global environment?
Suddenly, with the sharp drop in growth across regions, the market talk is dominated by recession/slower demand fears. Over the next few months these fears could remain in focus, and hence it is difficult to say whether we have seen the bottom for metals. We believe it is better to bet on commodity users now rather than commodity producers.
Among commodities, do you think oil will be the last one to collapse?
While most commodities are already down significantly from their peak levels or are trading at lower levels on a year-on-year basis, the crude oil market is still factoring in a fear premium led by the Russia–Ukraine conflict. Just recently, even crude has corrected below the psychological mark of $100 per barrel, showing signs of weakness driven by increasing recession/growth fears.
Companies will start releasing their first-quarter earnings scorecard in the current month. What are your broad expectations and do you expect significant downgrades?
We have witnessed more downgrades than upgrades after the March quarter earnings, though the overall aggregate numbers did not witness any significant downgrade. Even the June quarter results are unlikely to bring in any positive surprises. Commodity cost inflation is likely to impact corporate profitability margins across many sectors – which may not be fully reflecting yet in estimates.
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