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We are cautious in short term amid tighter liquidity situation: Srinivas Rao Ravuri


Looking at the reaction in financial markets across the world, especially Nasdaq and other asset classes like crypto, it is clear that easy liquidity played a significant role in bull markets in the past, says Srinivas Rao Ravuri, CIO, PGIM India Mutual Fund.

In an interview with ETMarkets, Ravuri who has over 24 years of experience in Indian financial markets said: “Interest rate hikes have already begun, and we expect increased volatility as we head to a tighter liquidity situation.” Edited excerpts:

What is your view on the market for May after a roller coaster ride in April. Do you think the age-old adage of ‘Sell in May and Go Away’ will come true in 2022?
It is a fact that markets have become more volatile, and that the last two years have been very good for equities. Excess liquidity has played a reasonable role in this.

Now, there are clear signs of liquidity tightening and that will impact the stock markets. We are building and managing portfolios with a 1 to 3 years view.

The Indian economy is on a structural growth path, corporate performance is better than the broader economy. Though we have seen a fair bit of selling from FIIs in recent quarters, markets have been resilient as domestic investors continue to show their confidence.

What is your call on the earnings which have come so far. Any sector which has disappointed you?
We were expecting pressure on margins but corporate India continues to do a decent job. So far, 24 out of Nifty 50 companies (with 58% weightage) have reported numbers.

The revenue growth came in at 12% YoY (4% above consensus estimates) and net profit growth came in at 26% YoY (6% above estimates). However, typically weak results come later on. So we are watching carefully.

How are you looking at broader markets in the current scenario? Do you see some volatility amid a likely hike in interest rates in the coming quarters?
Interest rate hikes have already begun, and we expect increased volatility as we head to a tighter liquidity situation.

Looking at the reaction in financial markets across the world, especially Nasdaq and other asset classes like crypto, it is clear that easy liquidity played a significant role in bull markets in the past. When liquidity tightens, the reaction can be violent.

Hence, we are cautious on markets in the short term.

What is your mantra when it comes to picking stocks?
Two most important mantras are: 1) sustainability of earnings growth, 2) how much we are paying for this growth.

We follow Growth At Reasonable Price (GARP) style for investing. Investing into equities is all about investing for growth, so our research team focuses on identifying companies that can deliver sustainable growth.

Also, we avoid companies that are highly leveraged and companies that do not generate free cash flow.

By the process of eliminating what we consider weaker companies, we are able to minimise risks and create a portfolio of stocks that can generate optimum risk-adjusted returns.

Inflation is likely to emerge as the biggest threat to equity markets and India Inc. Any sectors that could be impacted the most and why.
We believe moderate levels of inflation are good for equities. However, sustained higher levels of inflation will damage demand in addition to causing a spike in interest rates.

So, higher interest rates are negative for equity markets and India Inc. Some sectors like Auto, Consumer staples are clearly vulnerable.

Do you think investors will be better off going underweight on stocks that are likely to get impacted from rise in inflation, interest rates .
Investors tend to miss one very important mantra while investing – markets are looking at tomorrow, not today. Stock prices keep getting adjusted constantly to new developments.

So, it is important to understand how much of the likely impact of inflation and interest rates is already in the current stock prices of respective companies.

Where do you think the smart money is moving in 1H2022?
Given the kind of volatility one is witnessing across asset classes, the primary focus seems to be wealth protection. Indian equities are a relatively safer place. As a fund house, we have processes in place to minimize downside risks.

FIIs remain net sellers in Indian markets for some time now. Does it make sense for investors to lighten up positions in FII-owned stocks where foreign investors have a double-digit stake?
It is difficult to predict short-term movements of markets and the direction of FII flows. But, we are definitely in the camp that believes India will attract more inflows from FIIs on a structural basis.

Globally, there are a few countries that can offer sustainable long-term growth rates as India does. Stable democracy is a huge positive for foreign investors.

(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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