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Daily Voice | Markets don't tend to bottom out at average valuations, cannot rule out further downside, says Chirag Setalvad of HDFC AMC

While Setalvad, who is Senior Fund Manager, Equities, at HDFC Asset Management Company, does not rule out a further slide. He says any meaningful downside from here would lead to attractive valuations.

June 28, 2022 / 10:25 AM IST

"Higher rates, lower growth, tightening liquidity, moderating commodity prices and supply chain normalisation could begin to exert downward pressure on inflation towards the end of the year," Chirag Setalvad, Senior Fund Manager, Equities, at HDFC Asset Management Company, told Moneycontrol in an interview. Inflation is at a multi-year high now.

While acknowledging the possibility that the world’s largest economies could slip into a recession, Setalvad pointed out that the Indian economy is more domestically driven and may therefore perform better on a relative scale. But that does not mean it will be completely insulated from external events, he added. Edited excerpts:

Do you still see the possibility of another major correction?

To put things in perspective, after rising very sharply for the previous two years, the market has now undergone a meaningful correction. Post this correction, valuations, which were at a premium, have normalised and are now trading in line with their historical averages and hence valuations seem reasonable. The Nifty50 forward PE at 16-17x is in line with its 10-year average. Hence it makes sense to be more constructive on the market.

Having said that, it is very difficult and foolhardy to call the bottom of any market. Markets don't tend to bottom at average valuations and hence one cannot rule out a further downside. But any meaningful downside from here would lead to attractive valuations. Investing at below-average valuations should lead to better-than-average long-term returns for those who have the stomach to invest and the patience to hold on.

If valuations turn reasonable now, do you think FIIs will return?

At the outset it is very difficult to gauge any investor sentiment be it domestic or FIIs. Till recently, the Indian market had significantly outperformed a lot of its emerging market counterparts. Hence, we were trading at a meaningful premium to other emerging markets compared with historical valuation precedents. This, along with a general risk-off approach, may have led to elevated FII selling.

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Post the recent correction, valuations, both on an absolute and relative basis, have normalised significantly. We are now back to trading in line with historical valuations compared with other emerging markets. So, as the excesses have corrected, a good part of the reason to sell in India have also abated.

India is one of the fastest growing large economies in the world. The Indian stock market is also meaningfully large from a market cap standpoint. In the short term, a risk-averse culture may lead to India being ignored. But the economy's strong fundamentals and meaningful size mean that it cannot be ignored for very long.

Several quality stocks are either at fresh 52-week lows or way below their 200-day moving average. So, what are the themes that can be considered for buying now?

While certain ‘quality’ stocks may be at 52-week lows, their valuations should ideally be looked at from a longer-term perspective. How do they compare with their average five and ten year multiples? Some of these stocks, despite a correction, continue to trade at a meaningful premium to their historical averages. The downturn in the market has certainly thrown up some value but it is not across the board. So, I think it is better to be stock specific.

As such we follow a stock-focused rather than a theme-based approach to investing. Having said that, I think there are two interesting sectors to consider. The first is banking, where valuations are below historical levels, balance sheets have been cleaned up and where margins may fare well in an inflationary environment due to the floating rate nature of their loan book.

The second is the capital goods and infra sectors. Currently, there is a significant emphasis on infrastructure creation, which, along with a potential increase in private capex, could bode well for capital goods and infrastructure companies.

If the US and Europe slip into a recession, do you see a major impact on India, the fastest growing economy, as well?

If the largest economies in the world undergo a recession, it will certainly impact overall global growth and investor sentiment. While India may outperform from a growth perspective, it cannot be completely isolated. In fact, almost a third of earnings come from companies that are dependent on external demand.

Overall, our economy is more domestically driven and hence we may perform better on a relative scale from a fundamentals perspective but that does not mean we will be completely insulated from global events.

From a market standpoint, in the near term especially, correlation with global markets tends to be quite high.

Tell us about your investment strategy with respect to HDFC Mid-Cap Opportunities Fund and HDFC Small Cap Fund, which have given returns in line with equity benchmarks in the last couple of years…

In both HDFC Mid-Cap Opportunities Fund and HDFC Small Cap Fund, we follow a bottom-up, stock-specific approach to portfolio creation. We aim to focus on good quality companies that are available at sensible prices and then hold on to them for an extended period of time to benefit from the power of compounding. We want to create a diversified portfolio that seeks to minimise stock-specific mistakes while managing overall portfolio risk.

Do you see inflation risks getting normalised after the September quarter?

Central banks around the world are on a war footing in their efforts to tame inflation with 26 of 34 global central banks in tightening mode. Rates have risen significantly both in the US and elsewhere. At the same time, it is estimated that G4 balance sheets will contract by $3.2 trillion by December 2023.

As a consequence of high inflation and higher interest rates, growth forecasts have already come down both in the US and elsewhere. At the same time, we have recently seen a reasonable correction in certain commodity prices (though energy prices remain elevated).

Lastly, at some point, the Chinese supply chain is expected to normalise. This will help alleviate inflation pressures to some extent though it would also mean higher Chinese demand.

In summary, higher rates, lower growth, tightening liquidity, moderating commodity prices and supply chain normalisation could begin to exert downward pressure on inflation towards the end of the year.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.​
Sunil Shankar Matkar
first published: Jun 28, 2022 10:25 am
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