‘Global turbulence will not hurt long-term domestic growth’

Valuations are best seen in a relative perspective. If you look at global markets, one could argue that Indian markets are more expensive. On the other hand, if you consider the headwinds that most global economies are facing, India is in a much better place. And in that context, valuations look just about reasonable. There are also relative valuation differences within sectors and sub-sectors, and this allows enough opportunities for stock selection even after the recent run-up. Given the market levels and range of global headwinds, volatility will continue through most of next year. For long-term investors, this should not really matter.

All equity funds come with their share of risk, but picking the right fund suitable for long-term wealth creation goals and, more importantly, investing for the right time-frame help navigate that risk. The starting point to consider is the state of the economy and what it is likely to do over this decade. The policy measures taken over the last few years can be transformational in terms of the opportunities created. The winning companies of tomorrow may come from unexpected places and from relatively small beginnings. Small-cap funds are in a great position to capture this change. This journey, however, will be eventful, and, therefore, our small-cap fund is suitable only for those retail investors who have a minimum five-year horizon and can stay invested long enough to capture the potential of this segment.

FPI net outflows have been constant for over a year and a half now, led by a variety of factors, not just US rate expectations or monetary tightening. However, in the last few months, even in the backdrop of the Fed raising rates, FPIs have been net buyers and this has a lot to do with the long-term outlook for the Indian economy relative to the rest of the world. Pockets of growth and lower turbulence within global markets are difficult to find and our guess is that FPIs will be influenced more by that, when they allocate fresh capital.

The turbulence in global markets will inevitably have an impact on all major markets. The belief that the Indian economy is on the path to taking its rightful place in the global economy is incongruous with the term ‘decoupling’ that we are hearing nowadays to explain recent market up-moves. The impact of some of these headwinds will be certainly felt in certain sectors that have higher global linkages, and some of that has already played out in recent months in terms of price movement. We do not see this turbulence hurting the long-term growth story, but it will certainly play out in terms of increased volatility, and we must accept that as part of the market dynamic and react accordingly.

We believe that we are nearing the end of the rate hike cycle domestically and, to that extent, the impact on margins has not been significant. Other factors like potential change in Covid policy from China, which may spur global demand for commodities and hence inflationary pressure, or global recessionary fears impacting demand have a greater role in impacting earnings.

Some of the buoyancy in demand over the last year has been driven by the pent-up demand coming post pandemic, and this will normalise soon. Given the demographics, investment spend, which will aid job creation, and inflation beginning to stabilise, we still expect domestic consumption-related sectors to hold their own over the medium term, although valuations in some of these do appear a little stretched.

To be fair, the meltdown has not been very sharp. While the index performance may have been tepid, the fund performances tell a different story. In fact, mid-cap companies have been among the best performers over the last few months and this is reflected in fund returns. Interestingly, among fund categories, small-cap and mid-cap funds have seen the maximum level of alpha generation by the industry.