Here is our exclusive interaction with Sachin Trivedi of UTI AMC
We speak with Sachin Trivedi, Head of Research and Fund Manager, Equity, UTI AMC Ltd., about inflation, interest-rate hike and his lessons and experience with rate cycles.
The markets have turned volatile over the last few months due to rising inflation and geopolitical tensions. What's your outlook for the market in the short to medium term?
Nifty 50 has corrected by about 15 per cent from the recent peak in mid-October 2021 and about 6 per cent YTD (CY). Despite this correction, one-year returns are still positive at around 8.6 per cent (TER). Similarly, Nifty Midcap 150 index has corrected by around 18 per cent from mid-October 2021 and about 9.4 per cent year-to-date (calendar year), and one-year returns are still positive at around 9.4 per cent (TER). During this correction phase, earnings have improved, and valuations have corrected from recent peaks, but they remain higher than the longer-term averages. Therefore, in an uncertain global environment (geopolitically) where inflation and inflation expectations stay higher and central banks are forced to take action to curtail the same, earnings growth may be impacted, affecting valuations.
With the RBI biting the bullet on interest rates recently, how do you see the interest-rate cycle panning out? What could be its impact on the market in general?
Growth, inflation and balance of payment each have become pressure point for the economy, making it difficult for the RBI. And with the RBI prioritising inflation would mean rate hikes may be more front-loaded. From a growth perspective, any tightening of rates on the domestic front would act as a headwind. But if global supply chains/geopolitical tensions ease rapidly, it would be a big relief. In this dynamic and fast-changing environment, the RBI is expected to remain nimble and data-driven in its response to evolving conditions.
Theoretically rise in an interest rate should impact the discount rate, and therefore asset prices should come down. But if earnings growth is strong, investors may still make positive returns. Parameters, such as the yield gap, are at an elevated level despite the recent correction in the market multiples. This would suggest room for more correction if earnings do not surprise positively.
Which will be relatively more resilient? Why?
We like select names in private sector banks. We believe their credit cost should be well under control and they are well-capitalised to participate in the credit growth cycle. Even on the valuation matrix, we think they're reasonable. We also like select names on auto and auto ancillary despite rising interest rates. This space is under-penetrated and has grown at high single-digit to nearly double-digit in the longer run, but it has seen a contraction of more than 30 per cent in volume in many categories. Contraction in volume was primarily due to a sharp increase in the cost of ownership (due to regulatory changes and cost inflation) when per capita income growth slowed down. However, we believe the cost of ownership should stabilise from hereon, and growth in per capita income should improve as economic activities normalise post-pandemic. Auto space should benefit from volume ramp-up and operating leverage. Any correction in commodity should further boost profitability.
What changes have you made in your equity funds in view of the rising interest rates and to contain the ensuing volatility over the last few months?
I like companies run by sensible management, have good long-term growth visibility, and have a strong cash flow, and ROCE profile. Especially in this environment when inflation is a worry. In volatile times like these, we get the opportunity to add positions in these companies at reasonable valuations, and we have done the same this time as well.
You have many years of experience in equity markets and have seen multiple interest-rate cycles. Please share with us your experience and lessons with rate cycles. How can an average investor navigate them with confidence?
We have observed S&P 500 (in the USA) has given positive returns in seven out of eight rate hike cycles that have taken place in the last 50 years. In the previous two decades, even back in India, there have been two rate hikes of more than 300 basis points, and again in both these periods, returns are positive. Investment journey during these periods have been volatile, but the outcomes are positive returns. For investors, what is more critical is the stock selection process. And I draw my comfort in my process where growth is essential, but hygiene factors like company return ratio, cash flow profile, and management are critical differentiators. In tough times, companies get tested, and winners emerge. We need to stay on course with these companies. Yes, valuations matter but an attempt to fine-tune small moves may expose us to the risk of losing out on the potential significant upside.