Following a significant outperformance of Indian equities against global competitors, slowdown in growth, rising interest rates, geopolitical uncertainties and valuations in Samvat 2079 could weigh on domestic markets, Sampath Reddy, chief investment officer at Bajaj Allianz Life Insurance, said in conversation with Nikita Vashisht . Edited excerpts:
What are your return expectations for the next Samvat (year)?
Despite the correction in global equity markets, India was one of the best performing markets this year. It is aided by its relatively better macroeconomic situation and stable earnings growth. However, given concerns about a global slowdown, rising interest rates, geopolitical uncertainties and current market valuations, we expect moderate returns from Indian equities this year. In the long term, India’s growth story remains intact.
Which sectors/themes should be on investors’ radar in Samvat 2079?
We are positive on selected retail banks with credit growth picking up and a favorable/improving outlook for asset quality. We also like sectors exposed to domestic growth, such as industrial and capital goods. Also from a valuation perspective, sectors such as information technology (IT) and pharmaceuticals (pharma) are selectively approaching attractive zones.
What was on your buy/sell list in the past three months?
Banking has been one of our preferred sectors and the sector’s recent outperformance has been beneficial to our fund portfolios. We are also positive about the capital goods sector. Government push on infrastructure and an increase in capacity utilization above the long-term average should help revive the private capital expenditure cycle.
What is driving Foreign Institutional Investors (FIIs) to sell Indian equities, even though they remain among the best-performing securities globally?
As Indian equities significantly outperformed their emerging markets (EM) competitors, we could see some gains from FIIs, contributing to the outflows. However, India’s weighting in the MSCI Emerging Markets Index has increased significantly over the past two years, from around 8 percent to over 15 percent, making it the largest gainer by weight for any country in emerging markets. The outflows of funds from emerging markets worldwide (due to a stronger dollar) could also contribute to the outflows of FIIs from Indian equities.
What are the biggest investment lessons to date?
Fundamentals play an important role in the longer term. As Benjamin Graham’s famous quote goes: “In the short term, the market is a voting machine. In the long run, it’s a weighing machine.” Sometimes we see some exuberance or momentum in certain segments, as we had seen last year with some of the new age stock IPOs, many of which were issued at rich/high valuations. One of the most important lessons from such episodes is to stick to tried-and-true core investing principles, focus on the fundamentals, and resist the temptation to give in to the “flavor of the season.”
Are there any good counter bets in this market?
The IT sector lagged expectations of a global recession throughout the year and raised concerns about the sector’s growth. After the recent correction, IT company valuations are now approaching attractive levels. Similarly, the pharmaceutical sector has underperformed in recent months and lacks short-term triggers. However, on a selective basis, valuations are attractive.