Long-term data favors value disproportionately, says InCred’s Mrinal Singh
Stock markets have bounced back from a shaky start. Although corporate earnings in the first quarter of FY23 beat expectations after several quarters, healthy monsoons and a normal holiday season after two years should bode well for consumer-oriented sectors. In an interview with BL Wallet, Mrinal Singh, CEO and CIO, InCred Asset Management, brings his more than two decades of experience in investment management and equity research to weigh in on stock market outlook, valuation predictions, health corporate earnings, rising interest rates and the growth effect, and value investment opportunities. Continue reading.
The Indian markets (Sensex) after having fallen a lot, have now recovered. What is the market outlook from now on?
Over the long term, markets will follow earnings growth. Indian corporate earnings will continue to aggravate weak teens and so longer-term markets will reflect this. The assumption that inflation will decline in a quarter or two and that the global central bank will temporarily halt rate hikes has sent indices up too fast and too soon. We believe challenges on the margin front will remain. We expect a limited market over the medium term, with data on earnings growth, inflation, commodity prices and central bank actions providing major clues for sharp moves in either direction.
With the current rally, Nifty is now trading at 20x FY23 earnings. What’s your take on Indian equity valuations?
The broader assessment has risen recently in anticipation of better data points. However, it is too early to say that the worst is over. We intend to be nimble in our investment choices and continue to focus on companies where the medium-term earnings trajectory looks robust. Although Nifty is a broader barometer, our choices are not limited by the index.
We continue to search for potential picks across the public equity landscape. This looks like a very interesting phase for mainstream investors to build a portfolio over the next six months or so. This could result in a rewarding experience for the investor thereafter for the next three to four years. Being part of an index is not necessarily a criterion for our investment choices, the potential return ranks much higher than all the rest, as well as the quality of management, business risk, business model, etc. .
How do you see corporate earnings doing in the face of inflation over the next two or three quarters? In which sectors do you see risks and in which do you sense opportunities?
Most businesses will face tough choices between margins and volumes. EPS for Nifty companies has already been downgraded for the current year by most analysts. We believe that for the next three to five years, growth will be driven by the manufacturing side of the economy. In addition, PLIs (production-linked incentives) have been a strong incentive for businesses and the China plus one strategy has created a strong push in demand. Capex-oriented sectors that cover manufacturing, capital goods and utilities could be the main beneficiaries.
We believe that highly indebted companies could remain under pressure amid rising interest rates and currency volatility. Companies that depend on the United States and Europe for their business could also be affected, as these regions could potentially experience a prolonged slowdown or recession.
India’s central bank raised rates for the third time in a row. Do you see rising rates playing spoilsport with earnings and stocks? What are you doing to cushion this impact?
Companies have worked to clean up 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 more important imperative than interest rates. We believe that higher rated companies will have an advantage when it comes to accessing cheaper internal credits/charges and that is where we are focusing.
In your portfolio of InCred funds, how are you playing the markets today? What are your overweight, underweight and neutral positions? Why?
In our view, there are several investment opportunities today with structural growth at attractive valuations, after a long period of underperformance. We continue to invest selectively in cyclical stocks, with a keen eye on risk management and terminal value. We are also overweight Diversified Industries based on our capacity expansion outlook and see value in pockets of B2B companies in the pharmaceutical, automotive and automotive auxiliary sectors. Valuations are also supportive for IT stocks after the recent correction.
You have already managed a large value fund. Do you think “value” as a factor will play a dominant role in the future? Why?
The success/size of a fund reflects its good performance over a long period. We have always emphasized the performance of our funds before anything else. As clients trust us, the size of the fund gradually increases. We are the custodians of our customers’ hard-earned money and their trust in us. My intention has always been to follow the best investment approach in managing investors’ money, regardless of fund size.
Speaking of value, this has always been a dominant factor in investing and will continue to be so. It has stood the test of time across geographies, cycles and markets. Long-term data favors value disproportionately. Market cycles present opportunities that favor different investment styles at different times and I sincerely believe that it is up to an asset allocator or investor to choose an investment style wisely at the right time and do justice to the client’s investment. It doesn’t matter if the investment style is value-oriented, growth-oriented or something else, as long as it has been implemented successfully and consistently throughout a long-term cycle. The school of thought I belong to, value comes naturally to me. We have practiced this for a long time for the benefit of our investors and that is what we intend to do constantly, and we believe that our clients also expect the same.
If the situation of the Russian-Ukrainian war normalizes, do you think that actions at all levels could see a recovery?
War has always been a human catastrophe and has only created a big and a small loser. It is ironic that then and now we continue to see such a preventable humanitarian crisis. The world and industry can ill afford the supply chain and food safety disruptions caused by this war. Let’s hope wisdom prevails and the violence stops. We believe that as this happens, there will be a normalization of the global supply chain as well as food safety. This could have a positive impact on inflation and global trade, thereby reflecting better growth visibility for businesses across the globe. We see no reason why markets won’t view it positively.
August 27, 2022