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George Heber Joseph, CEO & CIO, ITI MF believes that India’s macro-outlook is likely to remain challenging over the next few months. Despite this, earnings growth trends are likely to remain healthy.
While the markets have seen some correction in the last four months, valuations are yet to enter an attractive territory. Besides, there is also a wide divergence in valuations across sectors.
The Indian Economy
The Indian economy is relatively placed better to weather tough macro-economic conditions.
With surplus food stocks with FCI (Food Corporation of India) and good agricultural production, India is likely to benefit from the global inflation in agricultural commodities. This can give a boost to rural India and the resultant rural buoyancy can then trickle down to urban India through higher economic activity.
India's capex cycle is expected to revive after a decade of low growth. Government schemes like PLI (Production Linked Incentives), developed economies looking to diversify their sourcing away from China, improved balance sheet of India's corporate and banking sector, increased indigenisation in the defence sector, and India's strong and large domestic market would continue to support the higher capex trend.
Returns vs risk-adjusted returns
We recommend focusing on risk-adjusted returns than focusing only on returns.
Today most of the market participants are focused only on returns but sooner or later they will start focusing on associated risks also. Currently, the market valuation itself is elevated and the starting point of the investment is also at an escalated price level. This means the future returns will be lower. Besides, the existing macro and increased growth challenges suggest the expected returns should be brought down further.
Looking into the extra-ordinary valuation risks in many stocks & sectors, we expect market overvaluation to start correcting in the next six months,
Sectoral views
Sectors that we are bullish about can be divided into two buckets - aggressive and defensive.
Within the aggressive category, we are positive on banks & financials, auto & auto ancillary, capital goods & engineering and select commodities. In the case of the defensive category, pharmaceuticals & healthcare and select consumer durable stocks can do reasonably well.
These stocks fit into ITI’s SQL investment philosophy ie. stocks having a higher margin of safety, good quality business and low leverage.
Few sectors like IT, FMCG and chemicals are significantly overvalued and have less margin of safety now.
Value theme to make a roaring comeback
Value theme could make a roaring comeback in the next 5 years.
While the period of extremely low interest rates was good for growth stocks, it was challenging for value investors. However, the road ahead is likely to be different that will restore some of the appeal of a value strategy.
Recommended funds
Equity investors, particularly in the mid and small cap categories, should invest systematically over the next 6 months through daily/weekly STPs or SIPs.
Investors wanting to invest in lump sum can consider balanced advantage funds. On the other hand, more conservative investors can opt for ITI Conservative Hybrid Fund for potentially better returns than traditional instruments and at lower volatility.
