‘The tsunami of inflows is likely to continue’

The equity markets go through cycles and trends that determine the performance of different sectors.

The veterans of the alternate industry Dhiraj Agarwal, MD, Ambit Investment Managers,  Madangopal Ramu, Head - Equities & Fund Manager, Sundaram Alternates and Sandip Bansal, Senior Portfolio Manager, ASK Investment Managers discussed the rise of equity markets in the last few years, latest trends and sectors which they think will perform well in the future during a panel discussion at the CafeAlt Conference 2024.

The discussion was moderated by Munish Randev, Founder & CEO, Cervin Family Office.

Here are the key takeaways from the discussion:

• During a good run of the markets, narrative takes over data. Some companies give very high returns in favorable market cycles and underperform later

• Over the last few years, companies which were growing at 5% started growing by 10% and were rewarded handsomely and more compared to companies which consistently grew at 20%

• Investors got a lot of surprise earnings in the last few years due to commodity tailwinds but that is going to be very rare going forward. So, portfolio managers need to be more careful

• The narrative for India is significantly better now than it was 4-5 years ago due to China+1, Europe+1 etc.

• Capital intensive sectors like infrastructure, manufacturing, defense, energy, PSUs are at the forefront of the investment cycle

• Capital raising is setting a good foundation for future growth. Corporate balance sheets are in a far better state that sets the stage for investments in the future

• Nifty has grown at a CAGR of 14%. Mid and small cap segments of the markets have done better than Nifty. This makes it appear that market is growing at a faster pace than it is

• Narrative is important to drive valuations. It shows how confident the investors feel about the country’s future. If you are more confident, you allocate more of your savings in equity

• As India’s narrative is strong, inflows in equity won’t stop anytime soon

• 7-7.5% of household savings of Indian investors is in equity. The allocation of household savings in mutual funds has risen from less than 2% to around 4.5% in the last 10 years. It has the potential to go up to 10-15%

• 2020 was a turning point when the government decreased pressure on credit and leveraging. Since then, credit is growing at a moderate pace. Debt/equity ratio has gone up but is still manageable

• Earnings momentum is dipping a little bit but retail investors are deciding the valuations now. They believe in the India story

• The risk is global shift of interest rates. The yield spread between US and Japan is likely to widen. There is downward pressure on dollar and upward pressure on yen which could create a global dislocation in currency market

• PE ratio trailing has remained the same in the last 1 year

• As long as geopolitical conflicts remain localized, markets will be able to take them in their stride. But if more countries get involved, it can affect the markets

• Another risk is of high interest rates globally which could damage banking and startup ecosystem

• Even when risks arise, it is important to evaluate them and not act in a hurry. It is also important to remember that there is also a risk of losing opportunity

• There is a chance that some of the thematic investment may not even give bank deposit returns. For example, few stocks in the IT sector were trading above valuations two years ago and did not generate any returns in the next 2 years

• Fund managers believe that high inflows mean they are in the right direction. They overestimate growth.  It is important to realize that most of the changes are cyclical in nature and when growth rate normalizes, you don’t get returns

• According to Dhiraj, to reduce risk, it is important to focus on where the earning momentum is up. Right now, consumption sector is showing an uptick while capex sectors are showing growth normalization

• According to Sandip, manufacturing is poised for strong growth for many years. If India gains 10% of China’s market, India’s manufacturing grows by 100% He adds that infrastructure and energy also look good

• According to Madangopal, the energy sector will do good for the next 5-10 years. He also bats for EV penetration to increase substantially.

Watch this interesting session now by visiting this link.