'Volatility isn’t hostile, it is beneficial for investors,' says InCred Asset Management’s Mrinal Singh

It is the quality of business and earnings growth that will result in superior returns.

InCred Asset Management’s CEO and CIO Mrinal Singh says that, without doubt, CY2024 will belong to rural consumption, as a sector. While it has been languishing for some time, Singh says he now sees encouraging signs.

In a conversation with Moneycontrol, Singh also spoke about the growing volatility in the market and how investors should approach these challenging times.

Edited Excerpts: 

How do you view the market volatility over the last few days?  

I come from an era where volatility was a norm. In the last 10 years, we have seen global central banks suppressing the saving rates/interest rates to an abysmally low level. This, in my view, was an aberration.

The world we are in is the norm. There has never been a very smooth sailing time. There is something always going wrong. Agendas change, and markets do respond in the near term to those fears, but the fact remains that most seasoned investors will continue to focus on profitability or earnings. As long as that trajectory is substantially positive, it is going to yield significant returns by investing in a wise way.

Will we continue to see the kind of volatility we have seen recently? My answer is yes. Does it bother me? Absolutely not. Do I look forward to it? Definitely! I don't find volatility hostile. It’s welcome for investors. Because volatility offers interesting prices to enter and exit. So, for long-term fundamental investors, like us, we embrace volatility. We love it. We look forward to it. People think it is difficult to make money in such markets. But investors can actually learn to embrace volatility and benefit from it. Keep your focus, stick to basics, elongate your horizon and you will make money!

So, are you saying it's a good time to buy for long-term investment? 

While what you want to buy is something that requires a lot of deliberation, in such a market where foreign factors are influencing the local equity market, you should buy what you think is rightly priced, not anything and everything. Don't be a lazy investor. These are markets where your patience, your hard work and your focus will definitely yield you very good results in the long run.

Are there any criteria or factors that you need to look at while picking sectors or stocks? 

While a lot of conversation happens around sectors, it is finally a business that you buy. Buying sectors and indices are speculator's business. We are in the investing business, we try to focus on businesses that we understand. The pecking order is very clear in our mind. It is the management quality which delivers balance sheets which see the shocks through.

It is the quality of business and earnings growth that will result in superior returns. I come from a school of thought where we try to make a judicious assessment of management quality, balance sheet and business fundamentals and the ability to grow profitability in a genuine way, not in an accounting way. This is the easier part. The tough part is to be patient and keep dealing with the noise that happens around.

Also read: Highest risk, maximum reward in healthcare lies in diagnostics, says Incred PMS' Aditya Khemka

If you were to focus on sectors, which would be the ones on your radar? 

I have no doubt in my mind that CY2024 belongs to rural consumption. It has been languishing so hard and so deep. And we are now seeing very encouraging signs. For the last six months, we've seen an arrest in the decline of volumes that rural-facing businesses had seen and there is some bit of nominal growth that we are seeing now.

We have generally observed that in the run-up to election, spending in the rural part of the country increases. There has also been erratic monsoon, higher raw material prices, COVID, etc., which have impacted rural incomes in a negative way. All of that will be behind us in the next six months. This should bode well for rural households, their incomes, and, consequently, their consumption. Rural is almost two-thirds of the economy, if not more, definitely in terms of volume. And India, as a growth story, is about penetration, about lower income and middle-income households having an increase in their income and consuming more. I think rural is definitely of interest to us in the near term. We also like capex-oriented businesses. We think that, in the next five years or more, there will be a lot of capacity creation in the system. We've had almost 10 years+ of lack of any capex in the system. Corporate India is pretty much de-levered. And they are very well placed. They're just waiting for demand to show up. The governments have rolled out the incentives in the form of PLI etc. The world wants us to supply more and is looking for an alternative to China.

Also read: Cash, F&O ADTV decline in October amid volatility in Indian markets

There is a lot of discussion about Fed rates. What is your view? 

While I am not an expert, as a market participant, my observation is that the Fed is very comfortably placed to not even think about reducing rates. The best outcome for the near term the Fed can deliver is to keep the rates where they are. The last GDP number in the US clocked at 4.9 percent. It was ahead of the estimates. And the Fed has moved up interest rates from practically 0 to 5.5 percent in 18 months or so.

It has not impacted growth, it has not impacted unemployment, it has impacted inflation a little. The Fed might continue to talk hawkish. Unless there is a crisis, the Fed will use this lever. But in the absence of that, I would work with the assumption that for the near term, the Fed rates are going to be where they are.

Over the last few months, there have been growing FII outflows. What are the sectors that will see more selling and how does this impact the market? 

I've been around 20 years. There was a phase where the sound of FII selling would collapse the market. In the last five years, we've seen that a huge amount of FII selling has gotten absorbed by domestic institutions. I would say that one should not bother too much about FII selling or buying, instead bother about profitability.

For any reason, be it geopolitical, external, or anything else, if FIIs do sell, the brunt of that selling will be seen in index-oriented names because that is where a large amount of FII money is. There would be, obviously, those select midcaps and smallcaps that will also see a run on their stocks. But I wouldn't be so very concerned about them. I would look at it as an opportunity for businesses that we think we like, but the prices were a bit on the higher side. So, if the prices come into a zone in our radar where we think it's interesting, we might pick them up. So we will look over the horizon if the volatility plays out due to FII selling.

Also read: BSE MidCap, SmallCap indices end 6-month winning streak in October

Do you believe the mid- and small-cap rally is over? 

The mid- and small-cap rally has been a six-month phenomenon, not very long. If I extend it to the past one year, it might not look like a great number anyway. And if I extend it to five years, it might look like a very ordinary number. The fact remains that there is a lot of action happening in the MSME space in India. But that does not mean that everything in the mid- and small-cap space has to deliver significant returns.

The broader mid- and small-cap rally is concerning from an entry price perspective. At a broader level, it offers suboptimal returns. But in the small-cap space, in particular, we do see windows of interesting prices in businesses. It just happens to be in the much lower rung of the market cap ladder where we need to be more careful about what kind of risk we are onboarding and how long things can be volatile because they need to have the ability to see through those phases.

We've been seeing that the number of investors in the market are growing. What would your advise to first-time investors be? 

If you look at a decadal number or even five-year number, the number of investors have definitely grown multi-fold. Still, the penetration is nothing great to speak of from a working age population. We have almost 140 crore plus population and almost 100 crore voters.

Mutual fund folios are around 15 crores right now. But, I don't generally think of demat account opening as a great indicator. A large portion of that can be speculative. But I would say for investors, a general upward trend towards people using an MF or a PMS or an AIF route to deal with the market is a wise approach. I would qualify that most people who are trying to do that are trying to invest, are trying to deploy their savings from a longer term perspective and they have been rightly advised and they have done some bit of reading at least about what it takes to make money in the market and they are seeking a middle path in terms of investment management capability through a PMS/AIF/MF for them to actually do good to their money.

But I do obviously worry about demat account opening numbers galloping at a very significant pace because first-time investors directly approaching the market can be a tricky game, particularly when the markets are volatile -- that too, if they have leveraged positions. They would actually, in my view, get categorised into speculator category rather than investor category.

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