Daily Voice | Valuation in new-age tech pockets still stretched, overweight on IT space, says this fund manager

Christy Mathai of Quantum Mutual Fund

"While there are certain improvements in some of the new-age tech companies, we continue to believe many of them are still figuring out profitable business models," Christy Mathai, fund manager for Quantum Long Term Equity Value Fund and Quantum Tax Saving Fund, says in an interview to Moneycontrol.

As a value manager, he thinks valuations in these pockets are still stretched despite the correction over last year.

On the banking space, Mathai, who has 7 years of experience in equity research across multiple sectors, says that while the sector has had a good run in the recent past, they are staying put with overweight allocation on the sector.

The fund house is overweight on IT services and finds it well placed to capture global market share, he says.

Do you see any possibility of a big rally in the equity market in the next 3-6 months period?

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Christy Mathai

Fund Manager- Equity|Quantum Mutual Fund

It is quite difficult to predict the near-term trajectory of the market as some of the triggers are highly uncertain. Some of the factors that will have a bearing are interest rate environment globally, inflation trajectory, valuation and flows into equity. Valuations across market capitalisations remain marginally higher than historical medians despite the recent bout of correction. Over the medium term, we are of the view that India is in an economic upcycle, which should help corporate earnings and thereby equity returns.

Do you expect the FII selling to continue for some more months? Can you explain the reasons?

If we were to look at the trajectory of the flows since the start of CY22, FIIs have net-sold $16.5 billion in equities and even in January 2023 the outflow has been $3.5 billion. The selloff was driven by steep interest rate hikes in developed markets, in an environment when India was trading at a substantially higher valuation with respect to the EM (emerging markets) pack and its own historical medians.

Some of these excesses have corrected in the recent past but one cannot rule out further correction owing to the highly uncertain environment we are in. India was also a net beneficiary of FII flows during the phase of China's internet crackdown in 2020-21 and some of these flows have reversed with China re-opening. Over the medium term, underinvestment in India will clearly hurt FIIs, as the country clearly stands out in terms of policy stability and growth among other EMs. We expect the FII flows to come back over the medium term.

What strategy can investors deploy in the current market scenario?

We recommend an investor be well-diversified across multiple asset classes. A mix of gold and equities after setting aside emergency corpus should help investors in these volatile times. Over the long term, we recommend investing in a mix of gold and equity at 20:80 after keeping 12 months of expenses in the emergency corpus. This ratio can be tweaked basis of an investor’s risk tolerance.

Specifically on equities, we are of the view that the Indian economy is in an upcycle driven by capex recovery. This should help corporate earnings over the medium term. The current market backdrop of relatively higher interest rates and broad-based economic growth will suit the value style of investment.

Do you think the time has come to start looking at new-age tech companies, especially after quarterly numbers?

While there are certain improvements in some of these names, we continue to believe many of them are still figuring out profitable business models. And as value managers, we think valuations in these pockets are still stretched despite the correction over last year.

With the banking system getting strong in the last several quarters, are you increasing exposure to the space? Do you see any kind of risk for the sector?

We have been overweight on banking post-Covid and while the sector has had a good run in the recent past, we continue to stay put with our overweight allocation on the sector. We consider banks to be major beneficiaries as the broader capex cycle picks up in India. In the near term, net interest margins and credit growth can moderate but over the medium term, we find banks reasonably placed on growth, valuation and asset quality.

Have you started taking big exposure in technology stocks given the reasonable valuations?

We had reduced our exposure to IT services at the start of CY22 as valuation expanded beyond our comfort range. Over the course of the year, many of these companies have corrected sharply on macro headwinds/margin concerns and we have been able to deploy into some of the large IT vendors. Incrementally, some of these cost pressures are receding; order books are stable, and valuations are reasonable after a sharp correction in CY22. We are currently overweight on IT services, and we find them well placed to capture global market shares.

What is your view on the Monetary Policy Committee decision and the RBI governor’s commentary?

The rate hike of 25 bps was broadly in line with market expectations. The RBI seems to be wary of the sticky core inflation while being comfortable with the growth prospects. Unlike the western countries which are witnessing a major interest rate reset since the global financial crisis Indian interest rate regime is getting normalised to pre-Covid levels, and hence should be broadly supportive of growth.

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