Long-term data favours value disproportionately, says Mrinal Singh of InCred

Stock markets are back on their feet, after a wobbly start. Though corporate earnings in the first quarter of FY23 missed expectations after several quarters, healthy monsoons and a normal festive season after two years is expected to augur well for the consumption-oriented sectors. In an interview with BL Portfolio, Mrinal Singh, CEO & CIO, InCred Asset Management, puts his over two decades of experience in investment management and equity research to weigh in on the outlook of stock markets, prognosis on valuation, health of corporate earnings, rising interest rates and growth effect, and value investing opportunities. Read on.

In the long term, markets are going to trace profit growth. Corporate India earnings will continue to compound low teens and the markets on a longer term would therefore reflect that. The assumption that the inflation will ease in a quarter or two and that global central bank will reach a temporary halt on rate hikes, made the indices move up too fast too soon. We think the challenges on the margin front will remain. We expect a range-bound market in the medium term, with data on earnings growth, inflation, commodity prices and central bank actions providing major cues for sharp movements both ways.

Broader valuation has moved up recently in anticipation of better data points. However, it is too early to say that the worst is behind. We intend to be nimble footed in our investment choices and continue to focus on businesses for which earning trajectory in medium term looks robust. Although, Nifty is a broader barometer, our choices are not constrained by the index.

We keep scouting for potential choices across the entire landscape of listed equities. This seems to be a very interesting phase for classical investors to build a portfolio over the next six months or so. This might result in an enriching experience for the investor subsequently for the next three-four years. Being part of an index is not necessarily a criteria for our investment choices, potential return ranks way higher over everything else along with management quality, business risk, business model etc.

Most companies will face difficult choices between margins and volumes. The EPS of Nifty companies has already been downgraded for the current year by most analysts. We think for the next three-five years, growth will be driven by the manufacturing side of the economy. Also, PLI (production-linked incentives) has made a strong incentive for companies and the ‘China Plus One’ strategy has created a robust demand push. Capex-oriented sectors that span manufacturing, capital goods and utilities might be key beneficiaries.

We fathom debt-heavy businesses may remain under pressure amid rising interest rates and currency volatility. Companies’ dependent on the US and Europe for business may also be impacted, as these regions could potentially experience a prolonged slowdown or recession.

Corporates have worked on cleaning their balance sheets in Covid and leverage is not a limiting factor today. Moreover, in the past we have seen that in times of rising demand, growth is a bigger imperative than interest rates. We feel top-rated companies will have an advantage with regards to access to cheaper credit/internal accruals and that is where our focus lies.

In our view, there are several investable opportunities today with structural growth at attractive valuations, following an extended period of underperformance. We continue to be selectively invested in cyclicals, with a keen eye for risk management and terminal value. We are also overweight on diversified industrials basis our outlook for capacity expansion and see value in pockets of B2B businesses across pharma, auto and auto ancillary stocks. Valuations are supportive in IT stocks as well after the recent correction.

A fund’s success/size is testimony to its good performance over a long period of time. We have always focused on the performance of our funds over anything else. As customers repose faith in us, the size of the fund grows progressively. We are custodians of clients’ hard-earned money and their trust in us. My intent has always been to follow the best investing approach in managing money for investors irrespective of the size of the fund.

Speaking about value, it has always been a dominating factor across investing and will continue to remain so. It has stood the test of time across geographies, cycles, and markets. The long-term data favours value disproportionately. Market cycles present opportunities that favour different investing styles at different points in time and I truly believe it is up to an asset allocator or investor to wisely choose an investing style at an opportune time and do justice to the client’s investment. It is immaterial whether the investing style is value or growth or something else, as long as it has been successfully and consistently implemented across a cycle in the long term. The school of thought that I belong to, value comes naturally to me. We have practised that over a long period for the benefit of our investors and that is what we intend to do incessantly, and we believe our customers also expect the same.

War has always been a human catastrophe and has only created a bigger and a smaller loser. It is ironic that in today’s age and time, we continue to see such an avoidable humanitarian crisis. The world and the industry can ill-afford the supply chain and food security disruptions due to this war. Hopefully, wisdom prevails, and violence ceases. We believe as and when it happens, there will be normalisation in the global supply chain as well as food security. This might have a positive impact on inflation, and global commerce, consequently reflecting better growth visibility for corporations across the world. We see no reason why markets won’t look at it positively.

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