Equity flows into mutual funds remain strong, boosted by SIP flows. However, the year ahead could be difficult for equities owing to high valuations and a slowdown in consumption. In an interview to Siddhant Mishra, Taher Badshah, chief investment officer at Invesco Mutual Fund, says markets could take a breather in 2023 after the strong showing last year. Excerpts:
Equity schemes continue to do well. What’s supporting the inflows?
This is an extension of Indian markets’ resilience in 2022. But the nature of flows was different in the latter half. While SIP flows were strong throughout, non-SIP flows have not been linear.
With a 2-year CAGR of close to 9%, which is still above the FD/fixed income returns, we are still well placed. However, returns have compressed from a 1-year perspective, with an estimated 4-5% appreciation in the Nifty on a 1-year basis. Earlier, fixed income instruments were not competitors, but with opportunities coming up, investors could consider their options. This could be a difficult year for equity flows.
Will the high valuations continue to bite?
We have seen this factor play out for 5-6 months. While India outperformed other markets relatively, there was a material surge in valuations from October. Though Indian markets do trade at a premium, it was higher than levels traded at historically.
India was at a near-80% premium to other EMs versus a traditional band of 30-50%, and 35% to developed markets versus a typical band of 10-25%.
Therefore, a repeat performance of 2022 was always unlikely, and money is bound to flow to markets with more attractive valuations. Fundamentally, we did well as our inflationary challenge wasn’t as high as other developed markets.
How do you expect the market performance to be this year?
In early 2022, we were going through re-opening, with a lot of pent-up demand to be met. This has normalised, with growth slowing down — especially in consumption-related sectors.
We saw 5-6 quarters of consistent surpassing of expectations by corporates after June 2020, which led to significant upgrades and, in turn, markets performing well. But since the last two quarters, the cycle of upgrades has levelled out, with companies delivering more or less in line with market expectations.
There could also be some drag owing to global markets. Given these factors, 2023 could see a flat market performance — more of a pause. Also, much of the global factors would have also played out, which will have an impact on Indian markets.
That could serve as a decent entry point for investors, who could then step up allocations to certain sectors.
Is a trend reversal in FII flows likely this year?
Outflows last year were mostly on account of interest rate hikes abroad taking place at a pace faster than in India, which led to foreign investors getting better returns in dollar terms outside.
Rate hikes this year won’t be of a similar magnitude, because of which a trend reversal is likely this year. However, India might get a lower share, with a lot of money going into China and other EMs.
How do you see the Adani issue affecting markets and the MF industry?
MF-related exposure to Adani stocks is very low. In fact, MFs haven’t been hit as much by events of the last one month as they have been in the last two years, when stocks of this group were doing extremely well but MFs were losing out because of non-ownership in these stocks.
Part of that is reversing, giving back some of the underperformance of the last two years.
What needs to be watched is the investment intensity in the country. The Adani Group has made large investment commitments in infrastructure, green energy, airports, etc. Any scaling back of these investments, with the group now reassessing its strategy, could hurt private capex. This is what will worry the markets.
Which are the sectors you are betting on?
Banks/financials are what we’re confident on, along with industrials, in which we see India doing well over the next couple of years.
At the same time, we’re marginally underweight on consumption-related baskets, which have seen softness of late owing to rising rates. We are neutral-to-positive on tech, after its underperformance last year, and fundamentally there is nothing wrong in the business. However, one may have to wait till the end of the year to see actual gains from IT.
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