“General elections are at best a transient event risk. Historically, we have seen that while there tends to be some volatility in the run-up to elections, markets tend to follow the underlying fair value over the medium to long term,” says Vinay Paharia, CIO- equities, at PGIM India Mutual Fund.
While from a valuation perspective, Paharia is cautiously optimistic on the market, he remains positive over the medium term, as India appears to be an oasis of green from a global top-down perspective. Edited excerpts from an interview with ETMarkets:
How was the year 2023 for the funds managed by you?Vinay Paharia: The equity funds of PGIM India MF have underperformed their respective benchmarks in 2023. The primary reason for this has been that in recent years, good quality and high growth companies have significantly underperformed their weaker counterparts.
This trend got further accelerated in 2023. However, over the long term (5 years and more), stock prices have performed in line with the underlying growth in earnings.
Similarly, higher RoE companies have delivered higher returns compared to their weaker counterparts over a five-year period.
From a valuation standpoint, what’s your take on Indian equities?
Vinay Paharia: We remain cautiously optimistic on the market from a medium term perspective. Our caution is because markets are trading at a premium to its current fair value. However, this fair value is likely to grow at a strong pace in the medium term, hence we remain optimistic.
How does 2024 look up for the Indian equity market? What are the key factors that will drive inflows?
Vinay Paharia: We cannot comment on the near-term outlook for the markets. However, from a medium term perspective, India appears to be an oasis of green from a global top-down perspective. Growth in India is strong, inflation is under control, currency and bond markets are stable. This is in stark contrast to the global developed world, where macro is weak, economies are slowing down, interest rates are elevated, inflation is sticky and fiscal pressure is growing.
Over a 3-year time horizon, we expect corporate fair values to mildly outpace nominal GDP growth, led by operating and financial leverage. Stable economy, consistent government policies, rising household income and favourable demographics will continue to drive FII flows into India from a medium to longer term perspective.
We saw DII inflows surpassing FII inflows by a wide margin in 2023? Do you think this is structural and one would see this trend continuing?
Vinay Paharia: The share of financial savings in Indian household savings has been on the rise at the expense of physical assets over the past few years. This has been a key factor for the rise in DII inflows and this structural factor is expected to continue over the medium to longer term.
FII flows, on the other hand, would be a function of multiple factors, including global interest rates, liquidity conditions and relative attractiveness of India versus other investment destinations.
Thus, while DII inflows into equity markets could be structural trend, it surpassing FII inflows by a wide margin as what was seen in 2023 might not be sustainable.
Which are the top 5 sectors you are betting on and believe will do well even in 2024 no matter what the general elections outcome would be?
Vinay Paharia: We are positive on sectors that are linked to domestic consumption. We expect consumer discretionary, healthcare and financial sectors to do well in 2024.
Do you see the upcoming general election outcome changing India’s narrative in a very significant way for global investors?
Vinay Paharia: General elections are at best a transient event risk. Historically, we have seen that while there tends to be some volatility in the run-up to elections, markets tend to follow the underlying fair value over the medium to long term.
Midcaps and smallcaps were the darlings of Dalal Street in 2023 and these funds saw unprecedented inflows. Do you see scope for the outperformance to continue?
Vinay Paharia: Currently, midcaps and smallcaps in general are expensive. Weak (low growth low quality) midcaps and smallcaps are in a bubble zone and caution is advised. Strong (high growth good quality) midcaps and smallcaps present an opportunity for long term investors.
So, in the near term, do you see money churning more into large caps versus midcaps and smallcaps?
Vinay Paharia: On a relative basis, we are finding more comfort in largecaps versus mid- and smallcaps from a valuation perspective. Having said that, within each of the categories, we continue to find good quality high growth companies which are available at reasonable valuations.
These companies could see strong growth in their fair value over a medium to longer term perspective and, hence, could offer reasonable returns over a 3-5 year time horizon.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
