Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance, in an interview with Himali Patel, explains Investors should not be influenced by market volatility

What can investors do to deal with market volatility?

Market volatility is an inherent part of equity investing. Historical data shows that even though equities as an asset class experiences intermittent volatility, it is one of the top-performing asset classes over the long term and has created significant wealth for investors. So, investors should not be overtly influenced by market volatility and continue to invest systematically/remain invested.

Also, during market volatility, asset allocation becomes quite important for investors.

What are the global factors investors need to be mindful of?

Trade war is a developing and escalating situation, and it is difficult to estimate the extent of impact of the same on global growth, although it will be a detractor, if it continues to escalate. On the currency front, the rupee has depreciated recently, but is still quite away from the life time-low of ~$74.5/US dollar touched in Oct 2018. Also, the rupee has outperformed most other emerging market currencies over the long term, some of which have seen significant depreciation versus the US dollar. Oil prices have also risen a bit lately, but is still in a comfortable zone, and quite away from its highs. Therefore we do not see it as major risk at this juncture. Geo-political tensions also need to be tracked, although it doesn’t appear as a major concern at this point.

Other global factors that we need to watch out for is global monetary policy and global risk appetite, as it will have an impact on foreign flows into emerging markets like India.

Going by fundamentals do you think the Indian market is trading at fair value?

With the recent correction, valuations have become more reasonable in the large-cap space. As mentioned before, with a few stocks pushing up the headline indices, valuations are elevated or rich in certain pockets. For the broader markets (mid/small-cap segments) the valuation has come down significantly, as they have seen a deeper correction over the past 1-1.5 years. At the beginning of 2018, the forward PE ratio of Nifty Midcap index was trading at a steep premium to the Nifty 50 index, but presently mid-caps are trading at a healthy discount to their large-cap counterparts. Historical data shows that mid-caps have generally traded at a discount to large-caps. We continue to prefer large-caps, but presently see some attractive bottom-up opportunities in the mid-cap segment.

Where do you see investment opportunities?

We have been liking private sector financials due to their continued strong credit growth and asset quality. We have also been liking capital goods/infrastructure sector due to the expected recovery - led by both government spending and as well as pick-up in private capex. We also believe that pharma sector bottomed out and hence overweight in this space. Even though there are good companies in technology and FMCG sectors, due to their price out-performance and valuations, we are neutral on this space presently. Auto sector continues to face slowdown issues, and metals sector is plagued by global trade wars, hence we are cautious on these sectors.