After months of a bull run, equity markets registered a monthly decline in November. The downturn was a result of multiple factors including concerns over new covid variant, rise in inflation and anxiety around expectations that US central bank will wrap up its stimulus program.
Is the correction in the last few days of November an indication of reversing market trend or just a few off days for the market? What are the major triggers? Which sectors are likely to outperform and which funds to recommend?
Here's what fund managers have to say.
What to expect
Harshad Borawake, Head- Equity Research & Fund Manager, Mirae Asset MF
- Near-term market performance to depend on the pace of withdrawal of stimulus, change in interest rate and corporate earnings growth
- We also need to keep an eye on energy prices, pace of US Fed's taper program and the possibility of third wave
- The recent rally in the market shows that companies are expected to post strong earnings growth in quarters to come
- Moreover, the second half of financial year is usually better for the Indian economy and coincides with festive season. So, we can expect the earnings momentum to continue
- Also, the key blocks for recovery — low interest rates, supportive government policies and supportive global macros — are largely in place
- Reforms like GST, RERA, labour laws and recent focus on manufacturing exports are long term positive factors
Rahul Singh, CIO-Equities, Tata Mutual Fund
- Markets are conflicted between two sides. Earnings recovery and investment cycle are the positives, while inflation and rich valuations are the negatives
- We are seeing a broad-based recovery which was initially led by IT/Pharma and has now spread to cyclicals including real estate, capital goods and industrials
- As a result, Nifty50 earnings growth is able to sustain and even marginally exceed the already high expectations
- We believe that the corporate profit growth of 30-35% in FY22 and mid to high teens growth in FY23 will ultimately restrain the extent of correction
- Global inflation risk is for real and any unexpected spike in bond yields will have an impact on equity valuations globally
- There are pockets of overvaluation in small caps and some sections of the IPO market but that cannot be generalized
Shreyash Devalkar, Senior Fund Manager – Equity, Axis Mutual Fund
- When the market is overvalued in many segments, it enters consolidation phase. And it has happened this time
- If the latest variant of covid-19 results in a third wave, a bigger correction can be expected in sectors directly/ indirectly affected
- Valuations differ across sectors. For example, valuations of FMCG companies haven't gone up much. Their valuations are very similar to the pre-covid period
Commentary on sectors
Harshad Borawake
- We are positive on discretionary and financials which would benefit in the recovery period
- Relatively stable sectors like Healthcare, IT along with some B2B businesses can also be looked at
Rahul Singh
- Multiple sectors are doing well ranging from defensive export led sectors like IT/pharma to domestic cyclicals like real estate and industrials
- Therefore, a diversified approach towards sectors is more suitable at this point of time
What to recommend
Harshad Borawake
- For higher allocations, large cap and hybrid funds should be preferred
- Recommend midcap and sectoral funds for long-term investment
Rahul Singh
- Balanced advantage funds make sense for first time investors
- For existing clients, MFDs should recommend a mix of equity and debt based on his/her risk profile
