Given the increased uncertainty, we are not looking to make aggressive deployment decisions: Axis AMC’s Ashish Gupta

Typically, equity markets don't like uncertainty. Uncertainty means that your equity risk premium goes up, which is negative for valuation.

On April 7, Indian indices traded in the red amid concerns of a growing tariff war. In a conversation with Moneycontrol, Axis Asset Management Company (AMC) CIO Ashish Gupta noted that assessing what this means for the Indian markets is difficult at this time.

While it is too early to say whether markets have bottomed out, Gupta added, “I think the market will certainly be very choppy over the next one year" with the policy flux that is likely to prevail. "It's very difficult for investors to make a definitive conclusion. And typically, equity markets don't like uncertainty. Uncertainty means that your equity risk premium goes up, which is negative for valuation,” he said.

Edited excerpts:

How do you read yesterday’s market fall?

The fact is that there is a very dramatic global event that is unfolding, and I believe that the scope of the tariffs that have been announced (by the US) and the magnitude is so large that it potentially will lead to several other reactions and events unfolding in the coming days. And unfortunately, at this point in time, we cannot be certain which way they will play out. For example, how will all the other countries react? How large an impact will it have on global growth? How do central bBanks react to this because in the U.S, growth will come down, but also inflation will go up etc.? There are many possible scenarios that can play out, including the fact that if the economic impact is going to be so large in the US, the markets are going to be in so much turmoil, the decision will be very unpopular. So, does the US hold back some of this? And although over the weekend they denied any plans of doing that, I'm sure the pressure on them will be increasing.

Would it be difficult to say whether the markets have bottomed out right now?

Yes, for sure. We believe that the markets are going to be choppy in the near term because as long as there is policy uncertainty, it's difficult for investors to make a definite conclusion. Typically, equity markets don't like uncertainty. Uncertainty means that your equity risk premium goes up, which is negative for valuation.

How do you expect this to impact foreign institutional investors (FIIs), considering the global markets are also in a difficult position?

If I just look at the tariff policy, on a relative basis, India is better off. One, the relative incidence of tariffs on exports from India is lower. Second, India's exposure to exports to the U.S and the overall share of exports to GDP is much lower. Also, you would have seen the steep correction in global commodity prices, particularly oil—that is also positive for India. So, on a relative basis, India does benefit.

But can we still expect capital inflows in a risk-off global environment? 

If we are in an environment of global risk-off, then I don't think we can expect strong capital flows coming in. You can expect capital pullout from India to be lower than what some other markets may witness. But it does not mean that there won't be any. If the dollar continues to weaken and if US rates continue to come down, there are prospects of FIIs coming to India. But if in a risk-off environment, the dollar again starts to strengthen, then the outlook for FII flows will not be great.

How are you looking at cash levels as a fund house?

Since June last year, we have become cautious on the market because we were not finding attractive risk-rewards in terms of investment opportunity. So, our cash levels have gone up since the middle of last year. Today, on average, we have double-digit cash levels at our funds. As I said, at this point in time, given the increased uncertainty about what will be the final play of events, we are not aggressively looking to make deployment decisions.

Are there any sectors that you still like, if the opportunity arises?

Our view is not sectoral; it is very stock-specific. Potentially, there are stocks where we believe that the right amount of growth is being priced, and they are at a reasonable valuation. Every day we are still selling something, buying something. We prefer not to take sectoral calls at an AMC level but more so at individual funds level.

There’s a lot of talk that domestic sectors may be better bets right now. Do you agree?

Certainly, but you should not generalise it. In the last two days, for example, the IT sector from its peak is down about 30 percent. It is a global sector. But are there IT companies where valuation can be looking more attractive now? The real estate sector, for example, is entirely domestically focused, and we are overweight the real estate sector. But if you see in this correction, real estate has corrected as much as the IT sector. I think it's difficult to generalise to look at price risk in a sector or stock just on the basis of its domestic/global exposure.

Also, when there's a big sell-off in the market, the sell down may not be very discriminating. So, particularly in the near term, even if the sector may be less impacted than the other, if the multiples are high or the growth expectations are high, even those pockets can be sold off. So you have to be careful to not just buy something because it is domestically oriented.

How are you assessing valuations in such a volatile market?

I think one of the frameworks we are using is looking at valuation as they were pre-COVID. Because post-COVID, given the excess global liquidity, multiples have expanded across the board. We are trying to go back in history and look at their multiples—not really just look at multiples from the lens of what were the trading bands in the last two or three years, but more over the last 5–10 years.

What do you see for markets going ahead?

I think the challenge is the fact that we really don't know what is going to be the end game. And I don't think tariffs is really the full event. I think it is just one of the series of events that is going to play out.  We need to see what follows in Act 2, Act 3. Also, as I say, we need to be careful about drawing conclusions based on these tariffs because there is a possibility that some of these policies may get revoked.