Why equities preferred over bonds: Rajesh Cheruvu

“Strategic asset allocation must be at the core of investor portfolio constructs wherein, current growth-inflation dynamics should support equities over bonds,” says Rajesh Cheruvu – Chief Investment Officer, Validus Wealth.

In an interview with ETMarkets, Cheruvu said: “India’s GDP growth for the next two years is expected to be the highest amongst all major economies. Even high-frequency macro data indicates resilience in India’s economic revival.” Edited excerpts:

The market saw a brief bounce back but then retested crucial support levels in June. What is the market factoring in?

Markets are factoring in partial factors related to war, inflation, and related monetary tightening. Markets can only partially do so since the full extent of each factor will not be known ex-ante.

Hence, some form of mean reversion can be seen in the short-term with markets overall not expected to exhibit a confirmed or sustained trend.

We are in the sixth month of the year or 1H2022 – the first 5 months have been nothing short of a roller coaster ride for investors. What is your take on markets in the short to medium term?

Equities took the “Sell in May and Go Away” phrase quite seriously, led by the risk-off sentiments brought on by Russia’s invasion of Ukraine and the global central bank’s hard stance on liquidity tightening.

RBI’s off-cycle rate hike also came as a shocker. However, earnings have been resilient and are forecasted to exhibit strong growth over the next two years vs. the single-digit CAGR of the last decade.

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Timing the markets is futile as no one can predict the troughs and peaks with certainty. Hence, strategic asset allocation must be at the core of investor portfolio constructs wherein, current growth-inflation dynamics should support equities over bonds.

March quarter was relatively stable for India Inc. Do you see some disruptions, and earnings downgrade in the forthcoming quarters?

Q1FY23 should be the first year of ‘normal’ operations for corporate India post Q1FY20. The energy vertical of India’s leading energy conglomerate is on track to deliver its best quarterly performance in more than 20 years with refining margins running almost 2x above mid-cycle.

Similarly, upstream profitability is at its best ever. The continued uptick in credit offtake, lower slippages and improvement in recoveries should aid Banking profitability.

Consumer Durables should witness an uptick in margins aided by price hikes taken and Raw Material headwinds subsiding with correction in metal prices.

With the government imposing an export duty, steel companies’ profitability could be under pressure. Similarly, with huge CAPEX announcements from biggies in the cement sector, there could be further consolidation in the space that might question the ability of firms to maintain price discipline.

Where do you see value in this market? Any sectors which you things have entered a buy zone after recent fall?

BFSI, IT, Media and Realty have suffered quite a lot. Financials are best placed to hold margins with an upside bias as receding credit costs and provision reversals can lead to earnings surprise.

Credit growth is likely to inch up with replacement CAPEX providing the impetus. Valuations are reasonable and attractive. Slowing deal wins and cost inflation could limit the price performance of IT.

New launches and improvements in chip supply in H2FY23 augur well for Auto. Lower real mortgage rates, improved affordability, and consolidation in favour of Grade A developers should aid the Real Estate sector.

FIIs continue to offload stocks in Indian markets. What is the main reasons — is it the fact that they are getting an exit, profitability, or it is just regular churn?

FIIs have been relentless in their selling in the past several months primarily due to India’s outstanding equity performance relative to DMs and EM peers from the pandemic lows.

As a result, India’s valuations relative to EM peers had risen to record highs. The rising bond yields were driven by monetary tightening led to a downward recalibration of PE multiples, especially for growth stocks.

The Russia-Ukraine war further led to a sharp spike in global risk-off sentiments with consequent energy and food insecurity concerns making EM economic recovery relatively more susceptible to evolving variables.

While FPI flows might be a tad volatile and currently amid a strong outflow regime, FDI flows on the other hand have remained resilient and sticky as ever.

In fact, India recorded the highest ever FDI inflows of $83bn in FY22 despite prevalent global macroeconomic concerns.

Do you see recession fears are real for global economies and India would also not be immune?

Amidst the economic and political turmoil plaguing India’s neighbours on all borders, the Indian economy is relatively better placed in South Asia to strengthen the current recovery and improve macroeconomic prospects in the future.

India is not only the best alternative to Russia and Ukraine for food security but also a significant beneficiary of China+1 for manufacturing.

India’s GDP growth for the next two years is expected to be the highest among all major economies. Even high-frequency macro data indicates resilience in India’s economic revival.

Composite PMI rose from 57.6 in Apr-22 to 58.3 in May-22, signalling its fastest expansion rate since Nov-21, led by Services output amid increasing cost pressures.

GST collections moderated to INR 1.4tn in May-22, but well above the INR 1tn mark for 11 consecutive months.

What should be the ideal portfolio mix for long-term investors especially the ones who have just started investing or trading in the age bracket of 30-40 years?

Portfolio allocation should not be done solely based on age. Multiple factors need to be taken into cognizance, like funding needs in the near and long term, the risk profile of the individual, any investment restrictions etc.

Once these are ironed out a mixture of Mean-Variance Optimization (MVO) to maximize the return per risk subject to any constraints, and Goals-Based Investing (GBI) should point to the ideal strategic asset allocation.

Over and above this, Tactical Asset Allocations can be made on a shorter-term basis to capture any mispricing in various markets.

What is the valuation metric that one should use to filter value picks excluding BFSI space?

During bull times, P/Sales can arguably be a good metric, but in bear and stable markets, focus generally shifts back to profit-making companies and P/E once again rears its head.

Operating level performance for a company can also be looked at in terms of EV/EBITDA.

What is the kind of rate trajectory you see from the RBI in FY23?

In May-22, the RBI initiated its rate-hike phase to avoid falling behind the curve and slaying the inflation monster. This was followed up by an aggressive repo hike of 50bps on 08-June-22.

OIS curves now indicate 120 bps repo rate hikes over the next 12 months meaning the repo is headed towards 6.20-6.25 odd levels. We believe the hiking cycle this time around could be quick, short and shallow given the external risks to growth.

Headline CPI at an 8-year high of 7.8% and WPI at a 17-year high of 15.1% has also jolted the government into action, announcing tax and duty changes to rein in domestic inflation and ensure local demand is not hampered.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

Roy Walsh

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