Markets faced an onslaught of negative news in the month of October. Rising oil prices, ongoing geo political tensions were global factors hurting market sentiment. On domestic front, shift of flows from emerging markets to US, credit squeeze post IL&FS default and lower corporate earnings influenced markets negatively. However, strong domestic flows in mutual funds acted like a balm in the otherwise turbulent market.
How did funds react?
IT funds, which were the top performers last month, saw the highest correction in October followed by energy. On market capitalization basis, large cap funds recorded a sharper fall in NAV than mid cap and small cap funds.
We spoke to Atul Bhole, Fund Manager, DSP Mutual Fund, PVK Mohan, Head-Equities, Principal Mutual Fund and Vinay Paharia, Chief Investment Officer, Union Mutual Fund to understand equity market triggers in the near term and their market outlook.
Triggers
According to Bhole, the November 6 US mid-term elections is an eagerly awaited event as it will determine who will be in majority in the two houses. A Democratic majority in either of the house will limit Trump’s legislative power.
As India is a net importer of oil, rising oil price have the potential to unleash meaningful inflation on India, said Paharia. Traditionally, oil prices record an increase in winter months, added Mohan. According to him, around 70$ per barrel oil prices would be at a comfortable level for India. In that sense, Iran sanctions announcement on November 4 will be an event to watch out for, added Bhole.
The earning season which will continue until mid-November, will be actively tracked by the market participants said Mohan. Participants will also take cues from the festive season sales, auto sales to estimate the third quarter earnings, he added.
The rising cost of capital globally owing to unwinding of quantitative easing program, higher inflation and growth numbers in US is a cause of concern in the medium term, said Paharia.
Another critical trigger for the market is the tightened liquidity post IL&FS default. CDs of many NBFCs and housing finance companies are maturing in November. Market participants are closely tracking their ability to repay the debt, said Paharia.
Bhole feels that the successful repayment will be a welcome relief for the markets.
Currently NBFC funding rates have increased. As NBFCs are major lenders to consumer durables segment, 2-wheelers, any curtailment in their funding will impact other sectors, cautioned Mohan.
The volatility associated with the upcoming state elections is also likely to hit the market in the near term, felt the three.
What to expect?
Mohan believes that the markets are likely to be volatile in the near term. In addition, he said that markets were now trading closer to their 10-year median valuation levels. However, if we look at a 20-year median valuation, there is still scope for some correction. Thus, we may see some correction in the next one and a half months. Post that markets are likely to stabilize, he added.
Paharia too expects the next few months to be volatile. The upcoming elections, tightening liquidity owing to the unwinding of Quantitative Easing are key risks to the market in near term. On a bright side, there are many drivers for improvement in NIFTY fair valuations in the medium term. The economy is recovering from the twin shocks of demonetization and GST. Over the next 3 to 5 years, improvement in investment demand could improve capacity utilization, he added.
Bhole expects markets to be volatile but confined to a broad range in the next 3-6 months. The upcoming state elections, budget and general elections will keep the markets on its toes. Moreover, any negative global event will add to the turmoil.
Sectoral preference
Paharia is bullish about IT and pharmaceutical and bearish on materials and financial sector.
Mohan is positive about cement, services e.g. hotels, insurance, consumer stocks at decent valuation, industrials and corporate banks while he is bearish on energy and overall financial sector.
Bhole is bullish about private banks, very selective NBFCs, consumer staples and consumer discretionary. He is bearish about energy and oil and gas sectors.
What should you recommend to your clients?
Bhole feels that in the current challenging markets, aggressive hybrid and multicap funds provide fund managers the flexibility to invest in good stocks unconstrained by market capitalization. Moreover, the mid and small cap segment is still slightly expensive, valuation-wise. Investors should consider staggering their investment in these funds. However, in case of a major correction, they can take some lump sum exposure, he added.
Mohan feels that in the current volatile markets, conservative investors should look at dynamic asset allocation funds or enter hybrid funds through the SIP route. Investors with an extremely long-term horizon can stagger their investments in multicap funds over the next few quarters.
Paharia feels that conservative investors should look at equity savings funds while investors with a slightly higher risk appetite can consider balanced advantage funds as these categories of funds are better positioned to handle the current market volatility. He believes that investors should take the SIP route to even out the impact of market fluctuations.
