It seems to be a busy year ahead for Sanjay Chawla, Chief Investment Officer and Fund Manager at Baroda Mutual Fund, with the events calendar for 2022 being dotted with a host of things to watch out for while drawing up the investment blueprint.
The Omicron Coronavirus and its impact on the economy top the list with the apprehensions of future mutations. The Fed pivot is important for the global economy, while back home, the upcoming Union Budget has started drawing the attention of financial experts. Monsoon is next in line to determine the pace of economic recovery.
Chawla takes special interest in monitoring the pace of digitisation and the progress of alternate fuel and carbon footprint reduction.
The markets have given above-average returns in anticipation of strong economic recovery that fuelled earnings growth. “We expect it to be a stock pickers market and not really a broad-based index rally,” the ace fiancé professional with more than 30 years of experience in fund management, equity research and management consultancy, shares with Moneycontrol in an interview. Excerpts from the interaction:
The market has given 23-25 percent return this year. Do you think the trend will continue in 2022?
In the last 10 years, the markets have given a CAGR return of 10-12 percent depending upon which indices you are monitoring. In recent times, the markets have given above-average returns in anticipation of strong recovery in economy driving earnings growth. Clearly, India is the world’s fastest growing economy today.
Based on the reforms and manufacturing renaissance and resilience of the consumption demand, I will not be surprised if India continues to be one of the better performing economies in the world next year as well. This should help in providing a boost to the earnings.
The Union Budget is scheduled on February 1. What are your broad expectations?
The impact of the Union Budget on the equity markets has reduced over the years. But the anticipations and expectations continue to belie the reality.
The government has taken proactive steps to mitigate the hardship caused by the pandemic. Both government intervention and central bank support with complementary policy by striking the fine balance between fiscal prudence and liquidity while ensuring rates that can induce risk appetite have helped the economy to rebound.
But the economic revival is still wobbly. Private sector capex is still not broad-based. We need policies that ensures that growth is sustained and the inflation is under check.
Do you expect an upgrade in corporate earnings? Which sectors, according to you, will drive uptick in the Nifty EPS next year?
After almost five years, we have seen earnings upgrades. Not only that, Corporate India is also beating the earnings estimates.
In the recently ended September quarter, sales of Nifty companies were up 31 percent YoY. Part of the reason for strong earnings growth seems to be due to base effect. This base effect could continue in the December quarter, too. After that we may see Corporate India delivering as per the economic growth.
Corporate commentaries indicate strong demand recovery during the festive season. But gross margins remain a concern for autos, cement, specialty chemicals, consumer staples, and consumer durables on the back of an increase in raw material prices. Nevertheless, companies have taken price increases to pass on the impact of the raw material inflation to consumers.
Downgrades in FY22 EPS in the autos, consumer, and metals sectors were compensated by upgrades in oil and gas, healthcare, and BFSI.
The FY22 earnings growth is estimated to be led by (a) metals and energy, which continue to benefit from strong price realisations and volume growth; (b) BFSI, which has benefitted from asset quality improvement; and (c) strong earnings growth in technology.
The broader markets – Nifty Midcap 100 and Smallcap 100 indices – rallied 50 percent and 60 percent so far this year. Do you expect this outperformance (compared to benchmarks) will continue in 2022?
We believe mid-caps and small-caps outperformed the broader markets on account of two or three factors: First, they had fallen very sharply earlier and there was a bit of catch-up. Second, heighten risk appetite from excess liquidity flowing into equity markets. And third, heightened retail participation.
The momentum was also supported by superior earnings growth (due to the base effect) in both the segments. From here on, we expect it to be a stock pickers market and not really a broad-based Index rally.
What are the key events to watch out for in the coming year?
First and foremost, we need to be more vigilant in terms of mutations of the Corona virus and their impact on the economy. Second major issue is tapering or rather pace of tapering that most of the global central bankers (including Indian) have been following a loose monetary policy.
The entire financial system is awash with liquidity. In India, we shall, of course, watch out for the Budget and then all eyes will be at the sky to see what the monsoon have in store for us.
Structurally, I would like to monitor the pace of digitisation and the progress of alternate fuel and reduction in carbon footprint.
What are the risks and concerns that can spoil the market momentum in 2022? Do you think FII outflow is a major cause for concern?
Globally, we need to ensure that coronavirus is completely controlled and does not rear its ugly head in any form of mutations.
Another factor that we are monitoring very closely is inflation. Internationally, they are passing it off as transient due to high energy prices. In India, it is supply-driven. Finally, we need to monitor the geopolitical positioning or posture by some of the large economies.
Although domestic retail investors in mutual funds have matured and understood the cyclicity of the markets and started believing in long-term potential of India, FII flows continue to impact the equity markets. In 2018, when the FII flows were negative and domestic investors were net buyers, the Indian equity markets were flat. Given risk off trade due to tapering, we may see FII flows at best slowing down.
What about themes that investors should add to their portfolio for strong returns?
Two trends that we believe in are digitisation and electrification. The opportunity is huge and technology is evolving. During early stage of technology evolution, it becomes slightly tricky to pick winners. The schemes of Baroda Mutual Fund may or may not have exposure in these sectors in future.
One theme that will endure is ESG (environmental, social and governance). There is a notion that developing nations cannot afford to bear the cost of transiting to clean sources of energy. It has been observed that companies which care about environment are rewarded by higher multiple.
The Baroda Dynamic Equity Fund has completed three years. What has been its investment philosophy as it is one of the top-performing funds in the category?
The idea of Baroda Dynamic Equity germinated to mitigate the human bias in equity investing. We have developed a model which determines equity allocation based on market valuations. Our study shows that we need to look at multiple fundamental parameters over various time horizons to really comment on whether we should be overweight on equities or debt.
Success of the fund can be attributed to three factors: Right equity exposure, being overweight (or underweight) on the right sectors, and bottoms-up stock picking in the sector. While the net equity exposure is a determined model, the alpha has been generated by the expertise of the investment team.
Investment philosophy of GARP (Growth At Reasonable Price) we follow in Baroda Dynamic Equity Fund is consistent across all our equity funds. Hence, we have seen improvement in performance of our equity funds.
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