In an interview with ETMarkets, Chawla who has over 33 years of experience in fund management, equity research, and management consultancy said: “One can shift to large cap/blue chip cos or defensives in the near-term to minimise the impact and then gradually increase the mix of quality mid and small caps,” Edited excerpts:
Equity markets turned volatile post the SVB fallout but stablised thereafter. But, do you think the worst is over?
Past experiences have shown that troubles in financial institutions can have a domino effect primarily from lack of liquidity when it is most needed.
Having said that, one should not underestimate the response of regulators and policy makers. Hence, as has been the case so far in SVB case, we should expect swift and timely action from regulators should there be any more issues.
Which stocks/sectors are likely to see a bounce back or see a reversal in FY24?
While the initial dust seems to have settled down from the potential fallout of an international bank. Regulators have acted swiftly to prevent contagion impact. That is the key to learning from Global Financial Crisis.
However, equity markets still seem to be on tenterhooks in terms of what the Global Central bankers (including our own RBI) would do in terms of rate action to curb inflation.
We expect Financial and Technology being the sectors that have got directly impacted by the recent turmoil are also likely to see trend reversals as well.Even though the stock market is volatile – there is a breather in commodity space. What is the kind of impact you see on India Inc. earnings and respective sectors?
With the fall in commodities prices, expectations are companies could see benefits in lower RM prices in the next few months. Companies is expected to see earnings improvement if demand remains strong.
In case of demand concerns, the fall in commodity prices benefit will have to be passed on to end consumers.
Sectorally, downstream Oil companies may see earnings improving on a sequential basis as crude prices have come down and refining margins have improved.
This could help OMCs to recover losses incurred in 9MFY23. Gas prices have also been corrected and hence help CGDs going ahead.
Consumer discretionary could see raw material prices coming off. However, demand seems to be slowing down. Hence lower commodity prices may help in either improving margins or passing on the benefit to stem a fall in demand.
We have seen some selloffs from FIIs, but how do you see flows panning out in FY24?
Post three years of inflows we saw large selling in CY22. That trend continues even during the first quarter of the calendar year CY2023.
Some of the factors potentially impacting flows in the near term are strong inflation, global central banks have raised interest rates. Consequently, FPIs are in a risk-off mode with flows moving out of emerging markets including India.
As inflation ebbs and Fed looks at pausing rates, we may see a reversal in flows to India. Also, China is seeing investor interest led by the re-opening of the economy and likely mean reversion of market returns given significant underperformance over the last five years.
We believe Economic growth for India continues to be strong. This should translate into earnings. Ultimately flows will flow to where money is to be made. India seems to be an attractive destination.
What is your view on Gold?
Historically, we have observed that Gold is a safe haven whenever there is global uncertainty. In recent times, higher inflation and turmoil in financial markets internationally has led to risk aversion. Hence, gold is back in focus.
Based on historic trends it has been one of the asset classes that tend to beat inflation. With higher inflation, we may continue to see gold continuing to do well.
Equities being a risker asset may give uneven returns till the dust settles down in international financial markets. Ultimately equities have been known to give better returns amongst all financial asset classes.
What is your view on currency in FY24?
We need to see currency on the back of global risk aversion among investors and measures to anchor inflation by the central bank.
Though the global recession fears triggered the fall in commodity prices (mainly crude oil), which is positive in terms of trade deficit, SVB fallout, and global banking woes creating an environment of risk aversion and hence EM currency may face some pressure amid the flight of safety.
Further, the hawkish tone of the Fed and if interest rates remain ’higher for longer’ can create pressure on EM Currencies.
INR may trade with some depreciation bias, but depreciation should be contained to the long-term run rate of ~ 2.5-3%. Some bounce back is likely if the risk-off sentiment settles or if the trade deficit narrows.
For a long-term investor – should he/she be worried? Or should they rejig their portfolio?
Historically, all the recessions or slowdowns have taught us that they are short-lived, and long-term equity portfolios have been an outperformer as against other asset portfolios and I believe it will remain so.
Every time a recession or a slowdown happens, it brings new learnings for an investor.
With regards to rejig in the portfolio, the portfolio needs to be diversified enough to withstand the impact of such recession or slowdown, however, one can shift to large cap/blue chip cos or defensives in the near-term to minimise the impact and then gradually increase the mix of quality mid and small caps.
Which will fare better – growth or momentum stocks in FY24?
We have observed that growth stocks are usually which eventually become momentum stocks. Our view is Emerging Markets (EM), including India, are growth markets and they do well most of the time.
It is important to be in the market for the entire cycle to benefit from growth/momentum rather than timing the market.
Any sector that could be a dark horse in FY24?
Pharmaceuticals is one sector that could be a dark horse after several years of underperformance. We see some drivers falling in place for the sector: pressure on input prices is coming off; the severity of pricing cuts in the US markets is showing signs of easing and valuations are at historic lows.
While there are still some question marks on the FDA approval of facilities, we believe that the sector could see re-rating as and when investors start to get more clarity on earnings growth. In the past it was seen to be a defensive sector.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of Economic Times)
