India is on the cusp of sustained economic recovery despite the near-term tailwinds of inflation and interest rates, says Arvind Chari, the chief investment officer at Quantum Advisors.
A combination of government spending improved corporate and bank balance sheets, a pick-up in residential real estate and hiring in formal employment meant that the economy will be on an uptrend, says Chari, backed by his 18 years of experience in investment management.
This is getting reflected in corporate earnings, he shares during an interaction with Moneycontrol. Of course, Quantum doesn’t rule out the market pullbacks, given the uncertain global scenario. But any such pullback will remain an opportunity to add to your India equity allocation, Chari believes.
Excerpts from the interaction:
Is it the time to think that we are near the victory in inflation fight in India as well as in the US?
The US inflation issue is more of demand-led inflation. The post-Covid stimulus from the government in terms of supporting peoples’ incomes and from the central bank in terms of low-interest rates, meant that demand increased for goods and services. Today, the US has growing wages and very low unemployment. Supply-side pressures may ease in the near term. The US though cannot claim victory over inflation.
We worry that the only way the US can get inflation back to the 2 percent level is to cause a recession, lower the demand and increase unemployment. That will take them to keep interest rates ‘higher for longer’.
The Indian inflation case is more or less the opposite. Given relatively high unemployment, not much income support during Covid, and excess capacity in the industry, we do not see broad-based demand-led inflation in India. So if we see commodity prices correcting, we should expect India’s inflation to remain within the 6 percent band. India is also relatively self-sufficient in food products and hence has the capability to deal with high global food prices. The RBI cannot ease off yet. However, they also do not need to hike rates way above average to curb inflation.
Also read – I would have put money in Akasa Air had Rakesh asked, says Ramesh Damani
Do you think the market is least bothered about the rate hikes be it by the RBI or the Federal Reserve?
For now, the markets are assuming that commodity price corrections, and base-effects will lead to lower inflation numbers than current levels. They are also hoping that as the economy slows down, the Fed will not only stop its rate hikes but will cut rates in 2023. Hence, they don’t seem bothered for now.
However, the probability of interest rates being ‘higher for longer’ is not priced by the markets. I would think, the markets will have to consider that possibility. That is not an ideal situation for global equities and the bond markets.
For India, the RBI is now sufficiently worried about the external sector and the Rupee. If oil prices stay above $ 100 a barrel, we should expect a Current Account deficit at around 3 percent of GDP. This requires a high level of financing – which could mean higher interest rates and lower equity valuation to attract those flows. India needs oil to sustain below $ 100 a barrel for the CAD to come to our sustainable level of 2-2.5 percent of GDP.
Is the equity market gradually getting strength with the easing of concerns and making itself ready for new highs in the coming months?
We have been bullish on the prospects of the economy. Despite, these near-term tailwinds of inflation and interest rates, we continue to believe that India is on the cusp of sustained economic recovery. A combination of government spending improved corporate and bank balance sheets, a pick up in residential real estate and hiring in formal employment has meant that the economy will be on an uptrend.
This is getting reflected in corporate earnings. The trend of formal companies gaining over the informal sector is an ongoing long-term trend. The gain in market share, consolidation in the markets and better ability to manage the economic impact is a very big driver of corporate profitability especially for listed corporate India.
We do not comment based on market levels, but we can see that, despite the market rise, the price-to-earnings (P/E) valuation has come down due to the rise in earnings. If I look at our flagship, Quantum Long-term Equity Value portfolio, it is positioned for this cyclical recovery and holds lesser cash than average despite the market being very close to its peak.
Of course, we cannot rule out market pullbacks, given the uncertain global scenario, but any such pullback will remain an opportunity to add to your India equity allocation.
What are the themes you are zeroing in on for investment?
My main theme is to keep it simple. If you follow, simple Gandhian rules of living to invest, investors would be on a path of financial freedom.
what would be your suggestion to those who are new to the equity markets and want to become independent?
For a large majority of investors, investing is a way to financial freedom. However, it should only be an ancillary activity. If you are not a professional investor, which means your day job is not investing/trading, then your investing activity is only to use your savings to meet your financial and life goals like emergency corpus, education, house purchase, wealth creation, and retirement.
Also read – As PSU clean-up changes perception about banks, experts see returns have legs to go on
The other thing to consider is how much time you need to spend on investing. The priority should be to spend more time in your work, with your family and friends, and pursuing your hobbies. One should spend as little time on investing as possible. If this is to be the framework for a majority of new investors, I would recommend mutual funds as the first step to investing.
Mutual fund offers to invest across asset classes, across the risk/return profile and provides a simple, efficient, low-cost means of diversified investing. Even in equities, mutual funds remain the best alternative for any investor. New or Old. Small or large.
As you gain exposure and experience over time and you understand the risk/return profile during different market cycles; of different sectors and different businesses and managements, a few may look at investing a part of their portfolio directly into the stock markets. For those, who need the extra adrenaline or who derive pleasure from doing their own research and investing, you may set aside a small portion of your savings and invest directly.
However, the benefits of professional management and diversification at such low costs through a mutual fund is almost unbeatable.
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.
