Investors should consider short duration funds amid rupee fall and FII outflows: Sampath Reddy

On the fixed income side, we continue to prefer shorter duration with rupee depreciation and foreign outflows being the key risk factors.

Meanwhile, on the equity side, we continue to prefer large-cap equities over the mid and small caps, Sampath Reddy, Chief Investment Officer Bajaj Allianz Life Insurance Company, said in an interview with Moneycontrol’s Kshitij Anand.

Amid the emerging market (EM) risk aversion in 2018, global strength in the US dollar, and the sharp depreciation in currencies of crisis-laden countries like Argentina and Turkey, we have also seen the rupee depreciate and fall to lifetime lows.

However, the rupee has fared much better than some of the other fragile emerging market currencies like the Brazilian Real, Russian Ruble and South African Rand CYTD in 2018.

It should also be noted that the rupee is also better placed during the US Fed Taper Tantrum of 2013. If the global emerging market risk aversion escalates further, then we may see the rupee depreciate further in the near-term, though most of the negatives are largely priced in.

Rising crude oil prices and the increase in the current account deficit, are additional risk factors that could put pressure on the rupee.

On the fixed income side, we continue to prefer shorter duration, with the rupee depreciation and foreign outflows being the key risk factors. On the equity side, we continue to prefer large-cap equities over the mid and small caps.

After the recent correction in mid-cap stocks, the valuation premium to their large-cap counterparts has come down. But, as midcaps still trade at a premium—we continue to prefer large-caps broadly from a risk-reward perspective.

Having said that, we are seeing some selective value in some segments of the mid-cap space viz. pharmaceuticals. With volatility in the markets increasing, we recommend that investors should invest in equity markets on a regular basis at frequent intervals.

A depreciating currency would benefit the export-oriented sectors like gems & jewellery, technology, and pharmaceuticals etc. The competitive advantage of these sectors would improve and corporate earnings growth of these companies would be strong.

However, a depreciating rupee could result in some upward pressure on inflation and may result in an increase in policy rates. A rise in interest rates will impact the profitability of companies; and the highly leveraged companies in the power, infrastructure, and capital goods segment could be impacted.

However, we feel that the RBI has been pre-emptive with two consecutive rate hikes in July and August, to help keep inflation within its prescribed target.

On the fiscal front, the government appears to be committed to fiscal discipline. Despite the rise in domestic fuel prices, the government has shown reluctance in cutting the excise duty on fuel prices.

One of the key learnings from the Lehman event and the global financial crisis of 2008-09 for investors is to have patience and maintain discipline when they invest in equity markets.

A lot of investors came in towards the top of the market in late 2007 and early 2008, and they got spooked by the fall in the markets and exited towards the bottom which resulted in large losses and a poor experience to investors.

However, investors who even came in during the top, but remained patient and disciplined, and continued with their SIPs/investments--would have generated handsome returns and created wealth for themselves.

As they say - It’s time in the market, and not timing the market—that matters, as the latter is quite difficult. Also, the famous quote by Warren Buffet comes to mind—“The stock market is a device for transferring money from the impatient to the patient”.

We have been overweight on the IT sector for quite a while now, and it has benefited our portfolio. IT sector is getting benefited from a weaker rupee and with economic/earnings growth picking-up in the US.

We also feel that the pharma sector may have bottomed out and increased allocation to that space. Most of the FDA related issues seem to be behind us now, pricing pressures have eased somewhat, and a weak rupee will also benefit the sector.

Considering that the markets have gone up, and valuations are above the long-term average, it is possible that we could see some correction or volatility in markets in the short term.

There are also some domestic macro-headwinds and global factors like elevated and rising oil prices and its impact on inflation & twin deficits, a weaker rupee, global monetary tightening by major central banks, and uncertainty on the trade-tariff front. Therefore investors should temper down their return expectations in the short-term.

However, over the long-term, we continue to believe that the India growth story remains intact, and India remains favourably positioned within the emerging markets space.

Economic growth is picking up as indicated by GDP growth and other high-frequency indicators. After a long time, the earnings growth trajectory is also recovering, and over the long term, the market returns should broadly track corporate earnings growth.

FII flows will depend on the rupee and the global risk environment. However, during the EM risk aversion in 2018, India has seen relatively lower FII outflows when compared to other EM/Asian peers.

Also, India still has one of the highest overweight position in portfolios of global emerging market equity funds and Asia ex-Japan equity funds, when compared to its weight in the respective benchmark.

On the domestic front, liquidity from mutual funds has been very strong over the past few years and touched record-highs, thereby helping to support against any FII outflows.

Although the momentum of flows into domestic equity mutual funds has slowed down marginally over the past few months, the SIP book of mutual funds (presently at over Rs. 7,500 crores monthly) will help support domestic flows into the market, as it is largely sticky in nature.