Top fund managers on what MF investors should do amid sell-off in Ukraine

In conversation with Livemint, Harsh Upadhyay, President and Chief Investment Officer – Equity, Kotak Mahindra Asset Management (AMC) Further explained why he thinks large-cap exposure or a combination of large, mid and small-caps is better at the moment.

Edited excerpt:

Given the high volatility in equity markets lately, what kind of equity funds do you recommend for low-risk investors?

I would say the large cap exposure is still better, as the earnings growth scenario is likely to play out for the entire Indian corporate world. Therefore, volatility in those earnings or volatility in stock prices may be less in the case of large established businesses. Thus, investors who do not want to take a high amount of risk can look into it.

But, for investors who can take higher risk, they can also consider mid and small cap or a combination of mid small and large cap equity funds as we believe that in the next three or five years, when our growth In case the economy is expected to return to reasonable strength, there will be opportunities in the mid and small cap segments as well, though volatility may be higher. But ultimately those segments should also deliver decent returns.

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Hence, depending on your risk profile, you can choose only large cap funds or a combination of large, mid and small-cap funds at the moment.

If the Ukraine conflict continues for a long time, albeit at a low level, what could be its impact on the Indian equity markets? What risk-reward should an investor be aware of when investing at current levels?

Look, monetary policies were changing around the world before the Russia-Ukraine conflict hit the markets. Now as far as the conflict is concerned, this could even be a short-term effect, we don’t really know how it plays out. But, I think the central issue for the markets is still changing our monetary policies globally. I think because this is a series that is happening after many years and we are just at the beginning of a new interest rate cycle. So as we all know, as the interest rates rise, it will have a negative impact on the profitability of the corporates. But, it may not be that high for Indian corporates, as Indian interest rates are still at a much lower rate than in the past several years and leverage is also very strong.

As far as another effect is concerned, that is about compression in equity valuations, whenever interest rates in the economy rise. This is something we have to keep in mind. We don’t really know how interest rates will work and the pressure on equity valuations in terms of timing. But it’s fair to say that another rewrite of the markets, especially when given that earnings growth is in line with expectations and unlikely to exceed expectations. And also the fact that interest rates are likely to rise means that re-rating prospects are low and markets may consolidate with either sideways or some downward movement, at least in the immediate term.

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So on net net, I think equity investors who are investing for long term should not really worry. In fact, any volatility you see now can actually be beneficial to long-term investors because you will be able to enter at a lower valuation over time. Anyway, one should not invest in equities for short duration. So what happens in the short term is very difficult to predict.

Do you expect the US Fed to ease the pace of monetary tightening due to the Ukraine crisis?

It is too early to say one way or another. Sure, they will consider the geopolitical situation for now, but at least in the immediate term, inflation has risen even more. The levels have risen from the level we were seeing pre-conflict. What effect this will have on development is yet to be seen. But I am sure that monetary decision makers will look at the impact on growth as well as inflation and then calibrate their interest rate decisions. Still, interest rate hikes are definitely on the cards, which is just the extent of interest rate hikes, which will be decided based on geopolitical events, I think.

Given the recent volatility in the market, what is your advice to investors?

We always recommend investors coming into equities to expect some volatility. I understand there was a one-way market movement between 2020 and 2021, which was essentially because the markets were reversing from lower levels post-COVID. And these types of markets are very unusual when the markets give super normal returns without much volatility. In fact, it was one of the longest periods where the market went up consistently without any meaningful 10 percent correction, which has clearly changed and as we discussed, many macro parameters are also changing. So in that context, it would be very difficult to put a number in terms of whether market valuations are stable or market levels are stable. It is fair to say that in terms of expectations, investors should expect more moderate returns from last week’s years.

Any particular sector or areas that you think can outperform others in the short to medium term?

Look, we don’t build portfolios based on what we see in a very short period of time. So to that extent, we try to build a portfolio that is fully diversified. While both technical and weak recovery momentum picks up in some cyclical areas, we should be able to see at least a few positive surprises from the earnings front. And this should lead to some sort of reading and performance in some other areas like IT and FMCG, for example, the appraisal looks quite rich and doesn’t leave much room for further appreciation in terms of evaluation. And also, these are stable areas in terms of earnings growth, it’s very unlikely that we’ll see positive surprises very different from those areas. So to that extent, the potential exists for a re-rating of valuations in the cyclical pockets of the economy. And that’s where, I mean, if you look at our portfolio, it’s leaning more towards the cyclical basket.

Amid a sell-off in global equity markets, should investors consider adding US stocks to their portfolio?

Yes, the international equity markets have also corrected, but I would not go to the extent of saying that they have become attractive as there has been selling pressure in the global markets in recent sessions. Hence, not only in India, but also globally, one cannot rule out further deterioration or further consolidation in equities. Having said that, global equities will definitely give you the benefit of diversification in the portfolio. There are various benefits for example, if the rupee depreciates, then international exposure is more beneficial.

You can also get information about some topics which are not available in India, for example, many industry segments may not be available in domestic context but there may be international companies, which are operating in that segment , which are profitable. , which are justified in terms of valuation etc. Therefore, that risk is also possible. Therefore, I would say that the diversification that every investor wants should also take into account international exposure.

The recent selloff has made a good number of stocks available at attractive valuations. Any particular stock selection strategy you would like to recommend?

You have to take due due diligence in terms of where that business is going, what are the valuations and how will the competitive landscape progress in the next few years, etc., to do that kind of analysis. And then based on your risk tolerance, and what you believe to be a fair valuation, you have to make a decision, which is not very easy for every investor to do. And this is where I feel, if you choose mutual funds, you will be able to get the benefits of professional research and fund management team. And your risk will also be much more varied. because even with a small amount let’s say 5000, you will be able to get a basket of shares proving the fund. Whereas if you personally build a portfolio and build a portfolio with good diversification, it will require a much higher amount.