“In the most recent bout of correction we are finally seeing even long-term investors cutting their allocation to mid and small caps and moving to large caps. Right now the large cap space is more attractively priced and we expect this migration (from midcap and smallcaps) to continue if the markets stay volatile,” Abhay Agarwal, Founder and Fund Manager at Piper Serica said in an interview to Moneycontrol.
The recent correction has brought down the benchmarks to fresh 52-week lows as the sentiment remained subdued globally amid inflation concerns, growth worries, and policy tightening.
He believes markets are already pricing in a lot of bad news and outcomes. There is consensus that inflation will continue to be sticky, interest rates will rise, USD will continue to strengthen, oil will get to $ 150 a barrel and Ukraine situation will not get resolved in a hurry. Edited excerpts from the interaction:
Are we seeing capitulation in broader space as Nifty Midcap and Smallcap indices already corrected 24 percent and 34 percent from record highs, compared to more than 17 percent fall in benchmarks?
Yes, in the most recent bout of correction we are finally seeing even long-term investors cutting their allocation to mid and small caps and moving to large caps. The sharp correction of more than 50 percent in some of the leading mid and small caps has led to investors seeking the safety of large caps.
The large cap space is more attractively priced right now when one considers greater certainty of earnings and cash flows. We expect this migration to continue if the markets stay volatile. Mid and small cap companies are also at a greater risk of earning downgrades.
Predicting a bottom or top in the market is always difficult. But, considering current risk factors, do you think we are near the bottom?
Markets are already pricing in a lot of bad news and outcomes. There is consensus that inflation will continue to be sticky, interest rates will rise, US dollar will continue to strengthen, oil will get to $ 150 a barrel and Ukraine situation will not get resolved in a hurry.
A very high probability of recession and stagflation has now built into the models. Therefore, any positive surprise can provide a sharp turnaround to the market since there is a lot of under-ownership with cash sitting on the side-lines. Any long-term resolution of these key issues will help the market form a strong bottom at the current levels.
Following the recent correction, have you spotted any segments that look really more attractive now?
After a sharp correction, leading IT service providers and pharma exporters are looking quite attractive. Rupee depreciation is helping them protect their margins and enterprise customer demand continues to be robust. Lower attrition and salary cost stabilization will help IT service providers while the pharma companies are benefitting from customers looking for alternatives to China.
Autos is another space that will benefit as steel prices cool off and supply chains for key components come back. The domestic demand is robust and a good monsoon will support rural demand especially for two wheelers.
Do you think investors should now start increasing equity asset allocation in their portfolio?
Our advice is that investors should stick to their asset allocation plan. The uncertain environment may create further bout of correction therefore it is best to refrain from bargain hunting or bottom fishing right now. However, investors should judiciously and in a systematic manner deploy new funds in case they are under allocated to equity in their portfolio.
To override the market volatility, it would be best for investors to use a systematic transfer plan that moves funds from fixed income to equity every month over the next one year. This will allow the investors to normalize the market volatility.
Do you think the risk of recession in the US and Europe turning into a “reality” now?
While the central banks in the US and Europe are willing to tip their economy in a short-term recession to beat inflation it is not a popular political choice. Therefore, we expect the governments to continue to seek ways wherein inflation can be brought down without killing demand.
Higher prices are already leading to sharp fall in consumer demand and down-trading in these economies and unless it is arrested soon the threat of recession becomes very real. There has been a softening of commodity prices recently and global trade from China has also opened. If that translates into lower inflation over the next couple of months, these countries may yet escape recession. But it will likely go to the wire.
After selling Rs 3.8 lakh crore worth shares so far since October 2021, are you hopeful that FIIs will return with substantial inflow in later part of this calendar year?
The one-way selling by FPIs over the last 9 months has confounded everyone who expected the flows to reverse. With India still trading at a premium to rest of the emerging markets (EMs) it will be a difficult case for global asset allocators to allocate new capital to India despite its higher growth.
We expect FPI flows to become positive only after the global markets stabilize and crude price corrects to well under $ 100 a barrel. At the same time we believe that the aggressive selling by FPIs is largely over and we will see a tapering of daily sale figure over the next couple of months.
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