We're excited about equities in current economic scenario: Rahul Singh

Consumption slowdown is a concern, although profitability margins are being protected due to softness in input prices, said Singh

It has been a turbulent week for the markets, characterised by firm crude oil prices, rising bond yields in the US, and the US Federal Reserve meeting. RAHUL SINGH, chief investment officer for equities at Tata Mutual Fund (MF), shares his insights with Puneet Wadhwa via email. He says that considering India’s growth is now expected to structurally outpace China’s, owing to the revival in the capital expenditure (capex) cycle and the growth of manufacturing in India, along with corrective measures taken in China, the valuation premium of the Indian markets is holding steady despite the associated risks. Edited excerpts:

Why are markets ignoring variables such as rising oil prices, erratic monsoons, and the busy political calendar in the months ahead?
 

The risks have not disappeared, but they are being offset by several factors that are sustaining premium valuations for India.

First, the balance-sheet strength across the economy is robust, especially relative to the rest of the world and China. It reflects the government’s fiscal position, low levels of debt in Corporate India, and a banking sector in a sweet spot. These factors differ significantly from what we are witnessing elsewhere globally.

Given the likelihood of India’s growth being structurally superior to China’s, thanks to the revival in the capex cycle and manufacturing in India, and course correction in China, the valuation premium of the markets is sustaining despite the risks.

Consumption slowdown is a concern, although profitability margins are being protected due to softness in input prices.

Foreign portfolio investment in equities in 2023 has been better than in the previous corresponding periods in 2021 and 2022. Do you expect a trend reversal as politics back home takes centre stage in the months ahead?
 

It’s challenging to predict whether political risks can outweigh the relatively strong fundamentals compared to the rest of the world. Global factors will likely play a more significant role in determining that.

For instance, a significant stimulus in China could diminish some of India’s advantages in terms of superior growth and lower input prices.

Similarly, while the US economy appears to be experiencing a soft landing, any financial dislocation due to future interest-rate movements could pose a risk to India as well. Therefore, we need to remain vigilant about these global risks.

What about retail investors and domestic institutional investors? How long can they support the markets if foreign portfolio investor flows disappoint?
 

Domestic flows have become more resilient. There is increasing penetration in domestic savings, and we have seen them able to absorb foreign institutional investor outflows during parts of 2021-22.

What has been your investment strategy these past few months? Have there been missed opportunities? Will the markets allow you to rectify those mistakes in the months ahead?
 

We adhere to a ‘growth at a reasonable price’ investment philosophy and have found the current market conditions conducive to generating alpha.

On one hand, a higher-for-longer interest rate scenario is promoting greater valuation discipline (although we have observed signs of it getting carried away in small and midcaps recently), and, simultaneously, the revival in the investment cycle has expanded the market and the choices available for investment.

Are you finding investable themes for the funds you collect via various MF schemes in short supply now?
 

The economy is currently witnessing a revival in the investment and manufacturing cycle, which has expanded the range of investment choices. However, we must calibrate the pace of inflows to align with investment opportunities without creating overvaluation or a bubble.

This is one reason we have discontinued lump sum flows into Tata Small Cap Fund. We remain enthusiastic about equities in the current economic scenario, which is becoming more investment-driven.

Small and midcap valuations are trading at a premium compared to largecaps, so we need to be more selective now.

With the Group of Twenty summit concluding key infrastructure deals, do you believe infrastructure-related stocks and offerings from MF houses could gain momentum over the next few months?
 

Infrastructure investments are being led by power, energy transition, and transmission. Additionally, corporate capex has started to rise for various reasons, including competition (paints, cement), China+1, production-led incentives, and changes in the global supply chain.

Railways and defence have also received government investment focus, in addition to the usual infrastructure sectors of road, port, and airport.