stock market news | volatility | Ukraine Crisis: Prepare for Greater Volatility and Subdued Returns: Harsha Upadhyaya
How are you approaching this volatility patch?
The list of concerns only goes on and on and initially, over the past two months, we were concerned about how a change in monetary policy at global banks would affect equity valuations and emerging market flows etc. . Now the Russian-Ukrainian conflict has been added to the list of concerns. It is too early to say what the short to medium term impact on the markets would be as we are only just starting to see some impact on the FX and financial markets and we are only a few days away of the conflict. It remains to be seen how it evolves.
In this scenario, once this conflict is behind us, monetary policies around the world will become the central issues for the markets and, to that extent, it is very difficult to say that volatility will subside once the conflict is resolved. It may take a break if there is a relief rally for a while, but I would say changing monetary policies around the world will be the central issue and will continue for markets in 2022 for some time.
Are we in one of those years where we may get very low returns or maybe no returns?
This is still not our basic assumption. We are still looking at earnings growth of around 80-90% for fiscal year 2023. I understand that if commodity prices do not calm down, there could be concerns about that earnings growth and it will not is not as broad as what we saw in the 2020 recovery and in 2021. So to that extent there could be risks in terms of expected earnings growth.
But even allowing for some compression in valuations due to the higher interest rate scenario and its impact on valuations, we should still be looking at reasonable equity returns. But one thing is very clear and it has already been visible in the first month and a half, that the volatility is going to be much higher than what we have seen around Covid, until about March 2021. The volatility is going to be more and the returns are going to be moderate. It’s hard to say how it will pan out, but it would certainly be more subdued than that.
Is it fair to assume that until Uttar Pradesh’s election results are known, one cannot call a bottom or a range at an index level, even though Ukraine and Russia would a truce ?
I do not think so. In a local context, the UP elections could certainly be something that market participants would look for in terms of the outcome, as it will have a reasonable impact on the 2024 elections. So, over the next one or two weeks, we may not see very big moves in the market and it will be more choppy in a range.
Over the past 15 odd days, would you say pockets of the market were right to buy on the downside and, if so, where would you recommend to snack or buy?
We saw the market as a whole correcting quite nicely, but the index didn’t show that kind of downward volatility. It may be less than 10% off the top, but the majority of stocks are trading at the low 200-day moving average, showing that the returns haven’t been there in the broader market for quite some time. So to that extent, yes, valuations are corrected, but in a situation where geopolitical events are rotating daily and equity valuations are causing concern even in the medium term due to interest rate changes that we are likely to see, a bottom is very difficult to call.
Just look at the companies and sectors where earnings stability will continue and these are the pockets where you would strengthen your positions in times of corrections. But at the same time, there are a large number of pockets where valuations are still high and if the market continues to move sideways or continues to correct, these pockets will remain under pressure in our view.
What exactly will your strategy be? Are you going to be very selective even in the case of banks?
We have been quite selective in the financial space. We have shifted our weightings from non-credit businesses to credit businesses and in particular to some of the large private and public sector banks. The thesis is simple; if we believe there is going to be an economic recovery in the country, then credit growth should improve and asset quality issues should ease.
In this scenario, a stable set of lending businesses – be it insurance or asset management etc. to those companies that are not lending and to the behavior of the economy in the future, to that extent our position has shifted to the lending companies.
Even within that, we looked at banks that are fixing their asset quality issues and are likely to do well in terms of incremental market share as we move forward. This is the change in position that we expect over the last two quarters.
In the IT space, what kind of actions would be on the list?
In the IT sector, we continue to maintain an equal or slightly underweight weight in our portfolios and the bulk is underweight and comes from mid-cap IT companies where we do not have a large exposure. We believe that the valuations of mid-cap IT stocks are still well above their historical averages, as well as their trade valuations which are at a premium to large-cap IT names. So, to that extent, in the event of a market correction, there could be greater risk on mid-cap IT stocks. We have only built our positions in large cap IT companies.