stock market strategy: ETMarkets Smart Talk: This fund manager remains underweight on IT for 2H2022, finds power sector attractive

“IT Sector has witnessed underperformance due to higher starting valuations and elevated growth expectations, both of which are now correcting,” says Vinay PahariaChief Investment Officer, Union AMC

In an interview with ETMarkets, Paharia said: “The power sector had underperformed in the earlier two years and hence has done better in CY22 so far,” Edited excerpts:

The Indian market touched a fresh 52-week low and then we saw a bounce-back largely in line with US markets. What should investors do — time to turn cautious or buy the fear?
According to our assessment, while the market is trading at a discount to its current fair valuation, the current macroeconomic situation remains very volatile.

The domestic aggregate demand growth appears to have started to decelerate, while the supply side bottlenecks continue to remain.

This has led to higher and inflation, which is a thorn in the flesh of global political and monetary authorities.

Hence, most central banks are now taking strong measures to tighten their monetary policies, and some are also resorting to quantitative tightening.

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This is likely to raise the cost of equity and reduce liquidity in the near term, which is likely to be bad news for risk assets like equity. Hence the near-term outlook remains cautious and very volatile.

However, the medium-term economic growth is likely to bounce back to moderate levels and could revert to our historical rate of growth.

Hence, we expect moderate growth in the Fair Value of Indian companies and as the markets are trading at a discounted valuation, the expected returns from equity assets could be higher than the fair value growth in the medium term.

We remain optimistic for equity as an asset class over the medium to long-term.

We will be completing the 6-months of 2022 and it has been a volatile journey for investors. What is your outlook for markets for the rest of the year? Will we hit 14K first and then rebound?
As discussed earlier, we expect near-term volatility in markets to persist. It is impossible to forecast with any accuracy, what can happen in the markets in the next year.

However, over a longer period of time, we have observed that markets follow the fair value and the fair value of companies in aggregate follows nominal GDP growth.

Since we are optimistic on India’s growth story over the medium to long-term, we remain optimistic about the outlook for equity markets over a similar time horizon.

Sectorally, realty and IT sectors fell by more than 20% so far in 2022. What is weighing on these sectors and will the weakness continue? Any top stocks which are worth buying?
The real estate sector is largely dependent on the availability of cheap capital for growth. Since the outlook for interest rates has hardened, the outlook is likely to weaken for real estate.

IT Sector has witnessed underperformance due to higher starting valuations and elevated growth expectations, both of which are now correcting.

We remain underweight IT sector as the risk-reward payoff for the sector appears weak, according to our assessment.

Power sector outperforms so far in 2022 – what led to the price action?
We have seen valuation mean reversion playing out in the markets over the last six months. The power sector had underperformed in the earlier two years and hence has done better in CY22 so far.

War, inflations, Yields, rate hike, and crude oil still remains relevant evil for equity markets for the rest of 2022 – how should investors prepare their portfolio?
Investors should avoid direct investment in stocks and instead consult a qualified financial advisor to help them navigate the volatile market environment.

They should definitely avoid having any unrealistic return expectations and should invest for a minimum 5-year time horizon while investing in equity markets.

If someone plans to invest Rs 10 lakh in H2 2022 – what should be the ideal investment strategy?
Investors should consult a qualified financial advisor to help them create a customized financial plan for making investment decisions.

Do you feel that FIIs outflows could stabilize or reverse in H2 2022? There are talks that retail investors might not be able to keep on putting money if the economy goes into a slowdown/job loss?
Money flow is like water, which finds its own level. FII flows will return if they feel the relative return expectation from India is superior.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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