The over 10 percent correction in benchmark equity indices and more than 18 percent decline in broad market indices have helped return some sanity to the Indian stock market, PGIM India Mutual Fund’s Chief Investment Officer Srinivas Rao Ravuri said.
In an interview with Moneycontrol, the fund manager warned that the correction is far from over and that geopolitics has become an additional concern alongside inflation for money managers.
Ravuri’s call around six months ago of a 10-15 percent correction in the market proved prescient with the fund manager calling out the bubble in the Indian primary market. “These stocks are on our radar, but they are still far away from my comfort zone. None of them are in the category where I would be excited at this point,” Ravuri said when asked if he will invest in new-age technology stocks post their meltdown.
A few months ago you had rightly called out that the market could suffer a 10-15% correction. How has your view changed?
At that point, there were excesses in pockets of the market and the IPO market was also in a bubble zone. There are things that are positive from the economic standpoint now, but I think there are a few new concerns as well. One of them would be interest rates and inflation. Our team thinks we will see interest rates moving up given the way inflation is surging, so I think that is a worry. But I think a bit of sanity has come back in the market with the so-called expensive stocks seeing a fair bit of correction. I don't think the correction is over yet. Besides inflation and interest rate, now we have the new element of geopolitics. What we saw on Thursday this week was unprecedented and definitely a cause for worry. So, I think there is every reason to be cautious about markets.
At an individual stock level, do you think there is now opportunity and value that investors can probably exploit going ahead?
I think there are opportunities but we also need to consider that for the last six months, FII flows have been negative. A certain segment of investors has been waiting on side-lines for markets to correct. But you know, if this was a 2 percent correction, people would get excited and buy, but when you're seeing the market falling 5 percent in a single day, panic sets in. So if we start seeing selling pressure from retail investors, who have been supporting the market in the absence of FIIs, that definitely will add to the problem. After the sharp correction, certain stocks have become quite attractive at current levels
How does oil at $100 affect your decisions from an investment point of view? Which are the sectors that probably become opportunities and which are the sectors that you may avoid?
Overall, we've been moving towards relatively safer stocks. The change in the portfolio is happening at two levels, first is the move from small-caps and mid-caps to large-caps. Second, we are increasing exposure to sectors that are less impacted by crude oil and other events. We are clearly avoiding quite a few sectors including the consumer sector, that are impacted by inflationary pressures. On the other side, we continue to like software and healthcare stocks. These two sectors are relatively more immune to the kind of volatility that we are witnessing in the market.
You were very skeptical about new-age technology IPOs. The stocks have seen a very sharp correction from the IPO price. Do you sense any sort of value emerging in this space?
As fund managers, we keep evaluating. These stocks are on our radar, but they are still far away from my comfort zone. None of them are in the category where I would be excited at this point. So they're still fairly expensive, even at these levels.
You have previously expressed bullishness for industrial stocks. What is driving this optimism?
We continue to be positive on the capex cycle. But unfortunately, stocks have run up quite a bit in the industrial space. Right now, I don't find any company in the value zone in industrials even though the space is good. So I'm a bit hesitant to invest more into the industrial space. I think current prices capture near-term upside and when you have a geopolitical event like the one we saw this week, it can definitely create nervousness among corporates and that is not a good thing for capital goods companies. As an entrepreneur, you want to invest when the environment is stable, not when there is so much uncertainty.
How do you expect the rest of the year to pan out for the Indian market given the rapid change in the macroeconomic scenario?
What drives markets are two things: corporate earnings and liquidity. If you see corporate earnings, in the current financial year Nifty companies are likely to report almost 33 percent profit growth. Next financial year, we are talking about consensus estimates of close to 19 percent growth in earnings. With inflation and other risks, you can see earnings growth come down to around 13-15 percent. Overall, I think we are doing many things right as a country. Something like the PLI scheme will have a huge positive impact on manufacturing in the country. So if the economy on its part continues to grow at 6-7 percent every year and corporates report double-digit growth, there is no reason to be worried about markets. This year, though, returns are likely to be muted given that 2020 was a great year and 2021 was an even better year.