‘Period of easy money-making likely behind us’

After a period of largely consistent and robust returns since the Covid pandemic, equities have seen a correction in October. Navneet Munot, MD and CEO of HDFC AMC tells Vivek Kumar M that this is a healthy correction, with unsustainable pockets seeing sharper cuts. He says the period of easy money-making is now likely behind equity investors. Excerpts:

Equities have given one of their best returns in a decade in Samvat 2080. Given the major events that we had back home and globally, what does this tell us about Indian equities?

Samvat 2080 has been another spectacular year for wealth creation for domestic investors in Indian markets. Despite the last year being witness to multiple important developments including worsening global geopolitics and volatility stemming from domestic general elections, the market delivered strong returns. This was largely a consequence of continued macro resilience and domestic liquidity. 

Samvat 2080 has been a great year, but things are not looking as good currently. What would your recommendation be for Samvat 2081?

Yes, the past couple of months have seen some reversal in sentiments. The primary driver of the market correction has been a sharp pullout of FPI money in October. However, the underlying drivers were also fundamental with overall market valuations running a bit ahead of fundamentals and multiple pockets of valuation froth emerging. In this context, the correction has been a healthy one with higher corrections being seen in more unsustainable pockets. As investors, it is important to retain the long-term focus, and such market drawdowns provide more reasonable valuations to step up investments. 

Unlike in the last few years, we have not seen a quick recovery in the market this time. How much could this impact retail fund flows coming into the market in your view?

Market performance always moves in cycles accentuated by sentiment excesses on either side. However, the financialisation of the domestic savings pool is a structural tailwind. Rising income levels along with low equity ownership provide a large headroom for domestic retail flows. The maturity displayed by retail investors and the coming of age of the entire investment advisory ecosystem suggests to us retail flows in the form of SIPs should remain robust. 

The broader market has been a clear outperformer in the last few years. Looking at the current market sentiments and earnings momentum, do you think it’ll be just as easy for the midcap and smallcap stocks to beat benchmarks in Samvat 2081?

The out-performance of the broader market had been sharp post-Covid and had further accelerated over the past year and a half, aided by strong retail equity flows as debt market taxations became unfavourable. While this was partly reflective of the breadth of earnings improvement that we witnessed, it was accentuated by the prevailing bullish sentiments in the marketplace. This led to some undesirable outcomes such as the proliferation of multiple pockets of froth with unreasonable valuations, high level of activity in the derivative segment, heightened primary and secondary market sale of securities, etc. It appears that such a period of easy money-making is behind and to that extent, one needs to be a lot more selective in stock picking going ahead to generate rewarding outcomes.

What would be key factors dictating the market trend this year?

Earnings trajectory would be the most dominant factor influencing market outcomes. Indian macro environment remains resilient with strong control on our twin deficits, moderate inflation and above-average growth. The sustainability of these factors would remain key to sustaining the premium valuations that we enjoy today as a country. 

Indian markets, despite being an outlier in terms of returns compared to the rest of the world in the recent past will not remain completely isolated from the developments in the global markets. To that extent, events such as the US elections, global geopolitics and the global interest rate environment would remain key factors to watch out for.
While we have seen momentum stocks do well for the last few years, some of them have taken a sharp hit recently. Do you think this will continue next year? 

Momentum in markets has reflected earnings momentum across a broad range of sectors and prevailing bullish sentiments. However, we are seeing earnings tailwinds reduce incrementally. Further, the sharp price momentum in many stocks took their valuations to unsustainable levels. A combination of the above two factors has driven the recent pullback. With markets appearing more balanced, the performance going ahead is likely to be more nuanced and discerning.