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Tuesday, January 25, 2022

‘Markets marred by high valuations for long, FY22 may see some flattening’

🔴 Interview with Kalpen Parekh, MD and CEO, DSP Investment Managers

Written by George Mathew |
Updated: January 10, 2022 10:37:15 am
Kalpen Parekh, mutual fund investments, stock markets, DSP Investment Managers, Business news, Indian express business news, Indian express, Indian express news, Current AffairsKalpen Parekh, MD and CEO, DSP Investment Managers (File)

KALPEN PAREKH, MD and CEO, DSP Investment Managers, spoke to GEORGE MATHEW on mutual fund investments and stock markets. Edited excerpts:

Where is the stock market headed in 2022? What are the major factors to watch out for? Can investors expect decent returns in the new year?

Stock markets have been marred by high valuations for long and FY22 could see some flattening thereof. Having said that, staying invested and using the correction opportunity to increase the quantum of investments will be rewarding. The Budget will set the tone of fiscal policy for the year and the monetary policy will derive itself from it. (The US) Fed is already tapering but will it move towards tightening? Will funding of fiscal deficits invite higher taxes? India will have 7 state elections lined up in 2022, therefore it will be a politically interesting year as well. Additionally, the West and China relations in a post-Covid world will create strong geopolitics dynamics. The trend is quite clear. We had two tough years of economic disruption and recovery. Over the course of the next few years, we will see growth rates normalise to trend levels. For the investing journey, nothing works like staying invested and reaping the benefits of compounding.

FPIs pulled out funds from Indian stocks in the last three months. Do you think they will return or withdraw more funds in 2022?

The recent sell-off has to be seen in context of rich valuations for Indian equities on the one hand and rising global risk due to news of Fed tapering, US dollar strengthening, inflation, etc on the other. The most important factor to note is while FPIs have pulled out $5.2 billion in 2021 net from secondary market, they have invested $10.4 billion in the primary market (IPOs) in the same period, which shows that there’s faith in Indian markets. The future will depend on allocation to emerging markets and India’s prospects vis-à-vis peers.

What should be the investment strategy of retail investors in 2022? Do you expect SIP inflow to continue in 2022?

Opting for SIPs is an all-weather advice. For example, an SIP in an equal-weighted Nifty fund has yielded 9 per cent more CAGR than lumpsum since inception. Similarly, in one of our international investing strategies, the last 3 years CAGR has been 4.2 per cent  excess via SIP than lumpsum investing. If there are sharp corrections, investors could look at monetising those by investing in lumpsum, but otherwise a disciplined SIP remains advisable.

Stock markets and MF industry have seen entry of new investors, mainly young investors, in 2021. What’s drawing them to the stock markets?

Young investors, given their qualifications, have a better understanding of the stock markets. Fixed deposits are giving sub-4 per cent return post-taxation. The lack of attractive risk adjusted returns in fixed income instruments has made MFs, especially the hybrid category, an interesting entry level asset for many new investors. Also, most young investors have been seeking education and ideas online and the learning curve is faster than at any time in history.

Do you expect the RBI to normalise the accommodative monetary policy and interest rates to rise in 2022?

A lot of it depends on how the virus pans out hereon. If significant mobility restrictions are imposed and there’s loss of growth, the RBI is likely to be accommodative for longer. Pre-Omicron base case assumed accommodation till FY22 but this could extend for longer if growth gets hurt by new lockdown measures. One thing is evident that current MPC is a growth focussed one. With inflation expected to peak out in Q4 of FY22, the RBI has more room to stay accommodative. A lot of it will also depend on the Budget announcements. Overall, we believe accommodation can now last longer but growth-inflation dynamics stand at a tricky juncture.

What will be the impact of rising interest rates on debt funds?

Rising interest rates usually impact most asset classes negatively. Interest rates are like gravity, they pull everything down. The long duration bond funds have a peculiar advantage currently. The interest rates on long-dated bonds like 10 years or more are enjoying a higher spread over short-term rates. This makes them a little less vulnerable. During rising interest rates, it is better to stick to the short end of the curve with short-term maturity funds to navigate rising rates.

What’s your assessment on the IPO market? Are IPO valuations high?

The IPO steam wasn’t just domestic scenario. In 2017, India saw $15 billion in IPOs but the global number stood at $215 billion. This time, the IPO rally is a huge global sweep with total IPO issuances at a whopping $600 billion. India recorded the ‘best IPO year’ in two decades with proceeds worth over $16.9 billion in 2021. The pipeline for 2022 looks strong with expectations beyond $20 billion. This is a common bull market phenomenon and the pipeline may shrink if the markets correct here on. The overall market valuations are buoyant and IPOs are no exceptions. Some of the recent IPOs that commanded high valuations have seen sharp cuts post listing. There are lot of opportunities in the primary markets but only when there is margin of safety for a long-term investor.

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