Rajesh Cheruvu of Validus Wealth
There’s respite from volatility for the equity markets, at least for the next few weeks, thanks to the sustained selling by foreign institutional investors, mounting inflationary pressure, liquidity control moves by central banks and supply chain disruptions.
Even after more than 12 percent correction in the last one-and-a-half-month, Rajesh Cheruvu, Chief Investment Officer at Validus Wealth, believes that it is still a ‘buy on dips’ market for good quality stocks that can be held from a medium to long perspective.
Investors can look at dominant businesses with robust and debt-free balance sheets with a healthy earnings trajectory and supporting cash flows, which are available at reasonable valuations due to a sharp fall in stock prices in the last few months, he says in an interaction with Moneycontrol.
Excerpts from the interactions:
Several risks have punctured the equity markets. Do you still expect 5-10 percent further correction in the coming weeks?
The equity markets are likely to stay volatile in the coming weeks, with persisting pressure in the form of sustained selling from FIIs, elevated inflation, tightening liquidity in tandem with a series of rate hikes and uncertainty from disrupted supply chains spurring further imbalances.
Is it still a ‘buy on dips’ market or the narrative have changed to ‘sell on rise’?
It is still a ‘buy on dips’ market for good quality stocks that can be held from a medium to long perspective. Investors can look at dominant businesses with robust and debt-free balance sheets with a healthy earnings trajectory and supporting cash flows, which are available at reasonable valuations due to the sharp fall in stock prices in the last few months.
The market has seen relentless selling pressure in last one-and-a-half-months, but FMCG space outperformed. How do you approach the space considering the rising inflation concerns?
While markets have been in a spot of bother as world over inflation has reared its head like never before, FMCG companies weathered this storm due to their brand power and high inelasticity of demand, which is inherent in consumer-oriented sectors.
However, we have off-late seen a sharp input cost surge for FMCG companies, led by supply disruptions in the Russia-Ukraine war. Most companies have undertaken price hikes to help sustain their margins. For investment into such companies, the comfort of valuations has undoubtedly been a cushion for investors due to current macro-fears.
FMCG companies earlier used to command lofty valuations (as high as 100+ P/E – price-to-earnings), which have softened a bit versus their prior rich history. Investment into these companies should be made with a hawk-eye on ROEs (return on equities); a precise cut analysis should be done to identify the sources of return for these companies, which, more often than not, is due to their branding power boils down to resilient gross margins.
What are the pockets that you are suggesting to investors as most of sectors have taken a sharp beating in last one-and-a-half months?
India’s manufacturing sector is poised to benefit from the ongoing government’s emphasis on indigenisation through the PLI (production-linked incentive) programme spreading across sectors. Further post-COVID China Plus strategy adopted by many companies to extend value chains to secure supply chain and improve scale and profitability.
The government’s stated spending plan on infrastructure over the next five years is supportive of the construction materials and ancillaries. Rising per capita incomes contribute to the structural shift in consumption patterns that are favourable to discretionary consumer names. Most of the stocks from these segments have undergone severe multiple compression, offering good entry opportunities to investors with a medium-term perspective.
Do you expect the RBI to lower its growth forecast for this fiscal, in its June policy meeting, given the elevated commodity prices and unstoppable Ukraine war?
The RBI is expected to hike the policy rate by 25-75bps in the upcoming policy meeting(s), following up on the withdrawal of its accommodative policy stance. It is also expected to raise its inflation expectations, which will likely be accompanied by a downgrade in its growth forecast for the year, ensuring it doesn’t fall behind the curve with red hot inflationary conditions. Correspondingly, the growth outlook for the current year is likely to be downgraded further.
Do you see a slowdown in DIIs inflow into the equity market if the volatility persists for a longer period of time?
So far, DIIs have been providing some cushioning to the relentless FPI selling in Indian equity markets and softened the blow of the multiple headwinds. While there have been concerns about growth going forwards, we believe that persistent inflation is a higher risk for bonds than lower growth for Equities.
As a result, inflows into Equity MFs and SIP contributions have been stable despite the market volatility and uncertainty. These positive flows are also likely to be supported by a shift away from DIY (do it yourself)- Investing, with investors’ risk tolerance being tested in such uneasy market conditions as well due to departure from WFH with complete unlock of businesses and workplaces.
What are the risks that the market is yet to price in?
Investors must brace themselves for the effects of tightening financial conditions, with the US Fed starting its Quantitative Tightening exercises to put a leash on the raging inflation levels and stagflation concerns. Moreover, from June 1, 2022, the US Fed will accelerate the reduction in its ballooning balance sheet and a series of further interest rate hikes, which may lead to further turbulence with the surge in cost of capital and liquidity for the market in the near term.
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.
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