Axis Mutual Fund’s CIO-Equity, Jinesh Gopani is bullish on these three sectors amidst the Russia-Ukraine led market volatility

Despite the ongoing Russia-Ukraine war and higher crude oil prices, the market benchmark S&P BSE SENSEX had recovered to the 60,000-levels. After seeing some recovery, the stock market has seen some correction again.

Jinesh Gopani, head, equities, Axis Mutual Fund, who oversees over Rs 1.3 lakh crore of equity investments, says the impact of rising crude oil prices on inflation cannot be ignored, and that it will have a big impact on how the stock market behaves and which sectors gain and lose.

In an interaction with Moneycontrol’s Jash Kriplani, he says Axis MF’s latest fund – Axis Value Fund – will look for stocks with cheaper valuations with a good turnaround potential, and avoid stocks of those companies with weak corporate governance. For other schemes, the fund house will stick to the growth style of investing it is well-known for. Edited excerpts:

In the last 6-7 months, there has been a huge selling by foreign institutional investors (FIIs), but the entire selling has been absorbed by domestic investors. Otherwise, such FII selling could have led to the market correcting sharply. This is a positive sign.

Other than that, we went through the first, second and third waves of COVID-19 and we have come out much stronger as an economy. Within the listed space, those companies with strong balance sheets have been able to bounce back strongly, compared to companies in the unorganised segment in the same sector.

The government's vaccination drive has turned the third wave milder, the economy is now opening up and there is momentum building on that. These are the positives that are helping the stock market to hold on.

From here on, it is not going to be easy in terms of looking for companies delivering earnings growth, when the base effect kicks in. Along with that, you have near-term issues of how oil, inflation, and the rupee will move. These will lead to positives as well as negatives for many sectors.

So, we are in a situation where the stock market is likely to be volatile. Crude oil prices will have a big influence on the economy. If prices are below $100, India can manage GDP growth. If prices rise and remain above $120 for a longer period of time, inflationary pressures will be pretty high. For now, oil is stabilising around $100-$110, despite the Russia-Ukraine war.

We don’t know how things will shape up, but it looks like investors are factoring in higher inflationary pressures, and I think even global flows are turning positive for us. We just need that momentum going for the economy. If that continues, earnings growth will take place, and the stock market can go to the next level.

If oil prices are in the $120-$130 range, domestic-oriented sectors will get hit in terms of earnings growth, and sectors like information technology (IT) and pharma should do well. When oil prices are lower, it will be the other way around.

It all depends on the risk appetite of the investor, and where they are parking their money. My advice is not to go down the quality curve. Valuations might look very attractive, but if things go wrong, there can be cracks in the stock prices. So, look for companies with strong corporate governance practices, quality and scalability of the business model. Then, look at the valuations: whether the stock is available at a decent valuation or not. Going down the quality curve can be quite risky.

We will predominantly remain growth-style investors, but to fill up the product basket, and for some of the investors who look at the value theme, we introduced this product. The idea is not to just look for companies with cheap valuations. A company trading at 10-times price-to-earnings or one-time price-to-book doesn’t necessarily mean there is value in the business. We are still looking for businesses that have an intrinsic value. For example, a company’s corporate governance is good, but the management is not able to deliver or doesn't have that firepower, and then there is a change of guard and now there is scope for a turnaround.

In a sector, let’s say there are 10 stocks, and maybe the top three-four are high-growth quality stocks with large profit pools. There could be an opportunity to look at the fifth or the sixth stock, without downgrading on the corporate governance side.

From purely an earnings point of view, financials, IT and specialty chemicals look good.