What is your outlook for large-cap stocks in 2022? What are your preferred sectors and why?
Large-cap indices have more than doubled from the bottom in March 2020 and have returned 18 per cent CAGR in last 3 years. The large-cap universe is trading at 30-40 per cent higher-than-average valuations on the expectation of a strong growth recovery.
So, in 2022, the market is expected to climb a wall of worry on various counts, like the next outbreak of the pandemic again disrupting economic activities and higher input, labour, and power costs resulting in higher inflation than the threshold level acceptable to the central banks, and withdrawal of foreign funds from the domestic market if interest rates rise globally, etc.
While these factors would have an impact across sectors, we are more focused on domestic economy-oriented sectors like industrials and real estate, which are seeing recovery after a long period of downturn.
Given that large-caps have been trading at a premium to historical valuations, what will be your stock-picking strategy, going forward?
We are focused on being invested in sectors where we expect growth to pick up and be longer lasting and hence there are prospects to make decent returns in the medium term, while the markets may consolidate or correct in the near term. We like auto and auto ancillaries sector, which have seen a lot of headwinds on account of demand impact during Covid, increased cost of ownership for buyers as manufacturers add features to comply with regulatory norms and to remain relevant in the EV world. India can be a manufacturing hub due to its large domestic market and the opportunity to supply components for EV and non-EV manufacturers in the export market.
Is monetary policy tightening by central banks such as the US Fed and the Bank of England, the biggest risk for the Indian equity market? How will the faster taper of bond-buying and expected rate hikes by the US Fed impact the Indian equity market?
Faster than expected rate hike, if it materialises, would lead to reversal in flow of funds from the equity markets.
However, the extent depends upon how much hike in rates we are likely to see.
Has the market fall over the past month or so provided some buying opportunities? If yes, what sectors are looking attractive on valuations?
The correction in the broad indices is not material, especially post the rally of last 18 months. However, the correction in financial sector, especially for banking sector, is sharp and the risk-reward has become favourable. Large banks with significant CASA deposit franchise are likely to be beneficiaries of higher interest rates.
Also read : Gold 2022 outlook by Chirag Mehta of Quantum MF
Large-cap funds are finding it difficult to beat benchmarks. Is active fund management still relevant at a time when passive funds are gaining ground?
It is true that in the recent past, many active funds have found it difficult to beat their benchmark, which is a phenomenon that occurs at periodic intervals. When a large amount of funds flow into passive funds, the same stocks in the benchmark are bought again and again, leading to continuous re-rating of these stocks vis a vis the broad market. However, when the flows reverse from these funds, the reverse too happens. It gives the active fund manager the opportunity to take his/her picks and the period of outperformance follows.
So, active fund management will always remain relevant.