Mumbai | Updated: April 26, 2021 6:04:30 am
KALPEN PAREKH, President, DSP Mutual Fund, spoke to GEORGE MATHEW on a range of issues, including the economy, markets, investment strategy and interest rates. Edited excerpts
With states announcing lockdowns to tackle Covid-19, do you think economic recovery will be hit?
As we speak, we have already seen GDP downgrades by various economists for FY22 in the range of 50-100 bps. The extent and severity of lockdowns would surely affect growth estimates. During the lockdown last year, larger companies performed well and emerged stronger. Some categories which were lagging in recovery like hotels, movie exhibition halls, malls, etc. would see the recovery process getting delayed further and essential categories such as healthcare, consumer non-discretionary and IT would be less impacted during the current lockdown. Larger population getting vaccinated at some point in the future would support the recovery process. We will need to live with the uncertainty of various waves of Covid and adjust to the economic uncertainty it would create.
Where are the stock markets headed? Will valuations be affected?
If you had asked this question in March 2020, I would have said stock prices would head lower due to large shock to growth and I would have been proven wrong. I run the same risk in answering this question again. The good news of recovery is priced in current valuations and there can be earning downgrades if we see more lockdowns and wave two and wave three lasting longer. On the other hand, all central banks around the world are supporting growth revival and markets to some extent by putting lot of money in the system (liquidity). So fundamentals could put downward pressure on valuation and liquidity would support it.
Should investors (direct equity and mutual funds) stay invested or book profits and exit from the markets?
Long-term investors who don’t need money for next five years should do nothing. Investors who need cash flow in coming years should take advantage of rising prices and valuations and take some profits for near term cash flow needs. My experience says most investors invest for long term but aren’t wired for large intermittent fluctuations. So, if one is going to panic in corrections, you better panic in rising markets than in periods like last March which were actually great investing times. Such investors may consider rebalancing their asset allocation and reach out to their advisors to take stock and evaluate any course-correction.
However, valuations being high alone should not be viewed as a trigger to interrupt long-term compounding. Investors who are uncomfortable with valuations can shift to dynamic asset allocation funds that automatically rebalance their equity exposure. But for the rest, who can sit tight through temporary price fluctuations, the best action is to do nothing. And if investors seek to increase their exposure to equities, they should consider a timeframe of at least seven years.
What should debt fund investors expect? Will their returns be affected?
Interest rates are low … hence, past returns of debt funds look good. You would know that when rates fall, bond prices rise and vice versa. We are currently at lower range of interest rates in the cycle. Macroeconomic data, especially fiscal fed growth and inflation, which influence direction of interest rates, indicate rise in interest rates whereas the RBI as well central banks the world over will buy little more time to seek conviction of the growth revival moving to growth sustenance.
This ‘jugalbandi’ between macro-economic data pushing yields higher and central banks trying to control the extent of rise in yields will seed volatility in near term. Drivers of returns in a debt fund are two pronged — accrual (as per current yields) and capital gains or losses depending on rates falling or rising. We are at the fag end of rate cycle which means that the accruals will be very low. Capital gains are made when the RBI cuts rates or government decides to reduce borrowing. Both look unlikely from hereon.
As fall in yields are largely dependent on the RBI actions, fund managers would reduce the extent of risk in their portfolio. Hence, over and above lower accruals, this explains the reason for expecting lower returns from fixed income funds through this phase of rate cycle. Lastly, an investor needs to identify the debt fund basis his horizon of investment, duration and credit risk boundaries of the fund and map it with his own appetite for volatility. Post this, it is advised not to do lot of things with his investment. A good active debt fund will reduce interest rate risk by investing in lower duration bonds and adjust back once rates rise.
Apart from Covid and lockdowns, what are the other near-term risks for investors?
A sharp rise in commodity prices can impact the ongoing demand normalisation trend and also affect margins of companies which can’t take price increases. Interest rates around the world are also at life-time lows and can rise. This would affect flows to emerging markets (EM) and also make EM currencies volatile. Lastly, it is worrying to see low quality companies’ stock price exuberance and the illusion of confidence on their fundamentals that can make investors ignore risks.
Do you expect the RBI’s accommodative policy stance will continue? Do you anticipate any hike in policy rates this year?
The RBI decisions to change stance as well as rate cycles are largely determined by trends in outlook on growth and inflation. When the government has spent (and spending) so much, revival of growth is imperative and along with a fiscal fed growth come side effects of higher inflation and higher current account deficit. This means RBI could be closer to reversal of rate cycle than in the past.
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