Expert Explains | ‘Good opportunity for investors to accumulate more (MF) units… best time to have an SIP’

It is an unfair ask for investors to expect fund managers to deliver good returns when the entire equity market is going through a downturn, but financial discipline while investing goes a long way while navigating markets in such uncertain times, according toKalpen Parekh, MD and CEO of DSP Asset Managers.

Market downturns such as these are also an opportunity to bolster your investments, Parekh said in an interview withThe Indian Express.

Edited excerpts:
The Indian equity market has been under significant pressure amid the war and the IT meltdown.

As a fund house, how do you maximise returns in such times?

There’s no way to maximise returns when the markets are down, and investors should also be very clear about that.

When you pool a large amount of money in an asset class, you broadly earn returns of 3% higher or lower than how the asset class is performing.

That’s the long-term excess returns that good fund managers deliver over the index, unless it’s an asset allocation fund or hybrid fund.

Secondly, how funds perform in periods of volatility is typically more a function of what we do when things are far more stable.

The discipline we show when things are rosy generally has an impact on how funds perform during periods of uncertainty.

For example, we have been guiding caution for the last 24 months due to high valuations and a slowdown in earnings.

The literature we published talked about how topline growth was peaking, margins were at an all-time high, and valuations were also in the 90th percentile.

What is your view on the market going forward?

How would you advise investors to navigate these uncertain times?

Since September 2024, we have seen the market broadly consolidating (Nifty 50moving between 23,000 and 26,000 points), and then in many pockets, there is a sharp price correction.

Valuations, which were at 25 times (the price-to-earnings ratio), have now come down to around 20 times, reflecting roughly flat markets.

We still don’t see significant valuation comfort, as there is heightened uncertainty due to an ongoing war.

Uncertainty regarding business or industry cycles is manageable because you can take a call that such cycles usually last for 2-3 years.

But geopolitical uncertainty is tough to predict.

All you can do is stay disciplined, prudent, and have your asset allocation in line with your ability to digest uncertainty.

I have no idea what will happen next.

So we would tell investors if your allocation has to be 60-40 (60% portfolio invested in equity, 40% in debt), and it has become 50-50 due to the market fall, then normalise it back to the usual levels.

Or bring the allocation down if you are overinvested in equity.

Investing should never be based on external factors, but instead focus on your own goals and risk appetite.

We should also not get carried away by the fall as an opportunity to overinvest.

Over the longer term, the average P/E multiple for the Indian market has been 16-17 times.

It had been stretched to 25, but we are back at 19-20 times.

So we are still maybe 1-year ahead of fair valuations, unless earnings recover very sharply.

And that is very uncertain.

Another piece of advice is not to get too nervous at such times and stop SIPs.

SIPs do not work if you are only investing in an upcycle.

Times such as these are a good opportunity for investors to accumulate more units, which would then build wealth when markets rise again.

So this is the best time to have an SIP, and maybe even to do top-up SIPs.

Earnings growth had already been slowing down.

Now, with the war going on and crude oil prices surging, how much impact do you see on earnings?

When do you think earnings growth will be back at levels attractive for FIIs again?

We are currently at around 8% earnings growth, which means we are in a low cycle.

A positive sign is that credit growth has started picking up after 3-4 years.

Oil prices are unlikely to have a material impact on the BFSI and IT sectors.

The other 40-50% of the (benchmark Nifty 50 and Sensex) index can have some impact, but it is too early to say.

If oil prices stay above $100 a barrel for longer, earnings recovery will obviously get delayed.

If that happens, there will definitely be some impact on currency, flows, and we might see some more corrections.

We are at a crossroads currently – we could see some more correction, or this might be the end of the downturn.

It all depends on when the Strait of Hormuz opens up.

Do you see the war in West Asia significantly impacting economic growth?

Also, do you think it might lead to an uptick in inflation if crude oil prices remain elevated for a longer period?

Could that change RBI’s interest rate trajectory and its policy stance?

If the war lasts for a longer period and oil prices remain elevated for 3-6 months, it will obviously have an impact on input prices, energy costs, and hence inflation.

There is no doubt about that.

It is also a bit premature for us to worry about the RBI changing its stance.

Anything can happen.

In general, our view is that if oil prices remain high for too long, it impacts currency and fiscal deficit.

Central banks then generally tighten things up.

So we’ll wait and watch.

The IT sector has faced a meltdown over the last couple of months due to AI.

How do you, as a fund house, navigate through such a situation, especially since some of these IT companies have been so popular in the recent past?

Over the last 2 years, we have been a bit underweight in the IT sector.

Since the sector is now down around 25% from its peak, it’s creating a bit of confusion about whether we should add them to our portfolio.

However, we are changing our stance on the sector very cautiously, as the sector is still at a 7% premium to its average valuations during the COVID times.

There was a bubble in IT stocks post-COVID, and these stocks went up 40-45%.

We might still be 6 months or a year away from comfortable valuations for the sector when we factor out the bubble.

We are thus still at a 5-10% premium.

It is very difficult to say whether this premium will be washed away in this scenario (where AI is a threat), or if the momentum will shift.

So you keep gradually adding these stocks in such percentages to increase our weightage in the sector.

Global IT majors are still cheaper than Indian majors despite comparable businesses and similar earnings growth, and FIIs will probably prefer the global names.

So Indian IT majors either need to become cheaper or these companies need to increase their growth rate dramatically.

These IT companies have quite uncertain earnings visibility in the near term.

Now that AI is seemingly becoming a big threat, why are you still accumulating IT stocks?

One reason for that is the extremely high free cash flows that these companies generate.

Historically, companies with such high cash flows tend to outperform the market even if earnings growth normalises.

That is our thinking.

There is indeed no clarity on earnings visibility for the sector, but that is why valuations are closer to comfortable.

Generally, I have seen you get better returns when there is no clarity.