Daily Voice | Markets can fall below recent lows only if both FIIs and DIIs start selling at the same time, which looks unlikely for known risks: Kamal Manocha of PMS AIF World

Market Outlook
Kamal Manocha of PMS AIF World

Kamal Manocha of PMS AIF World

“Going by valuations, the markets have less room for correction. Markets can only fall below the recent lows if both FIIs and DIIs start selling at the same time, which looks unlikely for the known risks,” Kamal Manocha, founder of PMS AIF World, who has more than 15 years’ experience in investment advisory, told Moneycontrol in an interview.

A correction means that the market is turning better from incorrect to correct levels, he feels. So, investors should neither be too fearful, nor be too greedy and welcome a correction in 2022 with a cautiously optimistic and opportunist approach, he advised.

The Bank Nifty is still 14 percent away from its peak while the Nifty50 is 7-8 percent below its record high. So, should one start buying the sector now? Are you overweight on the sector?

If one is a long-term equity investor, I would say, one sector approach is not a great idea, and especially a cyclical sector like Bank Nifty. Following a multi-sector portfolio approach is a better idea for superior risk-adjusted returns. Also, financial services is around 30 percent of the NSE500 and around 37 percent of the Nifty50, and over the longer term in this decade, this weight should ideally reduce in line with what has happened in the US, and the weight of IT & Tech companies, which currently is around 13 percent in the NSE500 & 17 percent in the Nifty50, should relatively increase.

And, since the Indian economy is in a structural growth phase, there are multiple other sectors that stand to gain. Thus, a portfolio of good businesses across sectors and market caps is a better idea than focusing on the Bank Nifty.

The market faces a lot of risks, including supply-side shocks and increasing Covid cases in few parts of the world (China, Germany, Hong Kong). The central focus of central banks is to fight inflation. Should investors be careful now and stay away from the market and high multiple stocks for the time being?

Equity is a risky and uncertain asset class and those investors who do not have a risk profile to experience volatility and loss of principal in the short to medium term should stay away from it. Risks like Covid, and Inflation are known to the market; the bigger risk is risk of the unknown. So, a risk focused equity investing mindset is a wrong approach.

Equity investing should be done with a returns focused mindset, remembering that it’s a game of non-linearity. And, the foremost rules of this game are patience and acceptance of risk with focus on returns. So, for investors who can afford to not worry about the downside for the first 500 days, equity is the best asset class, and these investors should shift their focus from market risks to portfolio returns through growth in earnings of the underlying businesses comprised in various portfolios and funds.

In short, approaching equity investing entrepreneurially, whereby risk is accepted and the focus is on returns, is the right approach.

We have had enough corrections in the recent past followed by a strong recovery too, but still there are a lot of problems including global inflation, higher oil prices and rising Covid cases in some parts of the world. Do you think the market has already priced in these headwinds or will it see one more sharp correction in the coming weeks?

I reiterate, what will happen next week is dependent on unknown risks that rely upon unknown factors. And, you mentioned Nifty is 7 to 8 percent down from its peak… so the market has hardly corrected and given the known and unknown macro risks of Covid, inflation, oil prices, war, the market can correct much more in 2022, after 2 strong years in 2020 and 2021.

So, investors should be prepared for correction and accept the risk of a downside. But, you should also remember, correction means, the market is turning better from incorrect to correct levels. So, investors should neither be too fearful, nor be too greedy and welcome a correction in 2022 with a cautiously optimistic and opportunist approach.

The market has already corrected up to 15,671 levels on the Nifty50 followed by recovery. What could be the worst-case scenario, if any, from here on?

Last year at the same time, the trailing Nifty PE (price-to-earnings) was above 40, and at present it is around 22. And, there is no sign of a slowdown in corporate earnings. So, going by valuations, markets have less room for correction. Since October 2021, FIIs have been selling and DIIs have been buying, so, the market can only fall below the recent lows if both FIIs & DIIs start selling at the same time, which looks unlikely for the known risks.

Do you think the current market volatility after recovery from the recent lows indicates that the Ukraine-Russia war will find resolution by the end of this month?

Thinking of this correlation is the beginning of a sure bad experience in the world of stock market investing. This is because, one, this is too short-term a perspective. And, two, the attempt to create a logical correlation of short-term market behaviour to an outcome of such a big and uncertain event like a war is illogical in itself.

The market behaves on perceptions and beliefs in the short term, and it’s only over the medium to long term that markets turn logical in behaviour. This is exactly why I have said have a 500 days minimum horizon whenever one thinks of equity investing, especially in 2022.

What are the sectors that will get impacted the most by  global inflation and should investors keep those sectors aside?

Since inflation affects purchasing power, it adversely affects the daily fixed income earning labour in the informal sector and people dependent on the fixed pensions, as for these people, income remains the same but expenditure rises. So, the consumer sector should be negatively impacted.

Secondly, the rise in inflation also impacts those businesses where manufacturing end products takes time and there is inventory created in between. For example, the construction business, where a house takes time to build but in the interim the rising price of raw materials will reduce margins.

Thirdly, other inflation impacts those manufacturing businesses where rise in input cost cannot be easily passed on to the customer because of competition. Investors should not take a one sector approach, but a multi-sector approach and focus on good businesses.

Every macro event has some negatives and some positives. A recent example is Covid-19. Also, if macro factors lead to a fall in price of good companies as their sector gets affected negatively, there can be an investment opportunity rather than a reason to stay aside.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.