In conversation with Satish Ramanathan, CIO – Equity, JM Financial Asset Management


As equity markets will continue to face the key risk of higher inflation and rising interest rates, Satish Ramanathan, CIO (Equity), JM Financial Asset Management, believes investors can also expect to a certain dynamism in the next quarter.

What is your outlook for the Indian equity markets in the short to medium term?

In the short to medium term, we see some normalcy returning to equity markets as fear of the unknown fades. Inflation and energy shortages are risks now well recognized by global markets. China’s slowdown and the rumblings of its financial sector must be observed. So far, the Indian economy seems to be emerging stronger from this formidable crisis. Therefore, we expect the markets to experience bouts of relief recovery followed by a few days of declines as the volatility indicated by the VIX index gradually normalizes.

How will the upcoming rate hikes by the Federal Reserve and the high likelihood of a recession in the United States affect Indian capital markets? Which fund categories are expected to perform well?

Potential interest rate hikes as well as quantitative tightening should be watched carefully. Commodity prices have fallen globally, with the exception of oil prices, as have shipping rates, so we believe this will lead to lower marginal inflation. Employment data remains strong. However, this implies that the rate hike cycle is not over yet. The question is how central banks will react: will they raise rates in step with a slowing economy or wait and watch for a gradual decline in inflation data? These questions will gradually be answered over time. In the meantime, the funds best positioned to manage volatility will continue to do well.

What changes have you made to your equity funds given the rise in interest rates and the high volatility of recent months?

We believe that the high sales of foreign portfolio investment (FPI) in Large Capsa drives down the valuations of large caps, making some of them more attractive than the Average capitalizations. At the portfolio level, we took advantage of this correction to increase our exposure to mid caps, while remaining overweight on large caps. We carefully monitor business results and make changes accordingly. We have increased the number of equities and also the coverage of defensive and consumer stocks such as consumer staples and the automotive sector. We are seeing some recovery in capital expansion and expect the momentum to continue.

In your view, what are the relevant risks facing equity markets in S2FY23?

Equity markets will continue to face the key risk of higher inflation and rising interest rates. The last few years have been turbulent as the GST, the pandemic and inflation have played their part one after another in impacting business performance. We have found that companies have used this volatility to their advantage by improving their financial health and rationalizing their costs. Earnings in the first half of FY23 could be impacted due to the ripple effect of commodity inflation, but going forward we expect demand normality, stable prices and an increase in exports playing their part in improving corporate profits. Energy prices will continue to be a wildcard as they influence discretionary purchasing power and government deficit due to higher subsidies. To sum up, we are generally more optimistic about H2FY23.

How should a retail investor approach mutual funds in the current scenario?

In general, retail investors have been remarkably resilient in the face of this market volatility as REITs have continued to sell off. Markets were overvalued before the start of the correction in October 2021 and global events led to a further decline. However, we are positive on the Indian economy. Many Indian multinationals and large companies have benefited from exports and the domestic market recovery. We suggest that a retail investor continue to invest in stocks with a large-mid cap allocation to benefit from their growth. A systematic preferred fund investment plan may be the best way to overcome this volatility.

How has the earnings season been so far? Which sectors do you consider vulnerable?

Markets tend to look beyond immediate news and so we expect earnings surprises to be well absorbed. The high inflation of raw materials will impact almost all companies other than purely tertiary companies. Over the next two quarters, earnings may not play out as expected, but should normalize in S2FY23 as companies optimize raw materials and raise prices. We expect some disappointment for steel stocks as the export ban has dampened their profitability, as well as for some FMCG stocks due to rising input costs. We expect this quarter to be a period of several cross-currents that need not be extrapolated.

What are the top three emerging investment trends that you think will dominate over the next decade?

Many major projects, which experienced delays due to various issues over the past few years, are now back on track. We see infrastructure and related services becoming a lasting theme going forward as public finances improve. We are also seeing huge reach in services such as online delivery, quick service restaurants (QSRs), etc., as discretionary income increases. This field is evolving very rapidly and could produce winners for the next decade. The third area where we see reach is fintech. Obviously, it’s not very big now but has something to disturb and positively surprise.


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