The equity market has been buzzing with activity, with IPOs flooding in and stock prices hitting new highs. While this creates a sense of excitement, it also brings forth questions about how to navigate the market's inherent volatility. Mohit Khanna, Fund Manager of Purnartha One Strategy, offers his seasoned perspective on how investors can make informed decisions during these times.
Why Market Volatility is the New Normal
According to Mohit Khanna, the volatility we’re witnessing isn’t unexpected. Domestic inflows remain strong, while at the same time, the risk-reward dynamic is increasingly unfavorable. This push-pull effect causes market fluctuations. The equity markets have had a stellar run over the past two years, and now, with valuations soaring above medium-term levels, we’re seeing pressure to correct. However, liquidity is moving rapidly, buying the dips and keeping the volatility alive.
Khanna emphasizes that the next few months will remain uncertain, with major global and domestic events lined up. From the U.S. presidential elections and anticipated interest rate cuts to the Indian assembly elections and Union Budget, there are several factors that could swing investor sentiment in either direction.
2QFY25 Earnings Outlook: What to Expect
When asked about expectations for the NIFTY50 Q2 earnings, Khanna highlighted the challenges posed by external factors such as the heatwave and elections during Q1FY25. However, early signs indicate a sequential recovery in demand, fueled by pent-up orders. The strong monsoon season has also been beneficial, particularly for Kharif sowing and water storage for the upcoming Rabi season.
With these factors in play, Khanna anticipates a stronger performance in Q2FY25. More importantly, he advises keeping an eye on management commentaries regarding execution acceleration. This, he believes, will be crucial in determining whether companies can meet their earnings expectations for FY25.
Sector Preferences: A Balanced Approach
When it comes to sector allocations, Khanna shares a clear strategy:
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Overweight: Capital Goods, Infrastructure, Metals & Mining, IT, and Healthcare. These sectors benefit from government infrastructure spending, private capex, and defensive plays that thrive in uncertain markets.
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Underweight: Autos, Retail, and Consumer Durables. These sectors are under pressure due to high valuations and intense competition, which could affect their return on equity in the medium term.
In addition, Khanna reveals a contra call on Chemicals, where he favors selective companies that have completed their capacity expansion, positioning them for higher utilization and growth.
The Shift in Investment Strategy
Purnartha One Strategy, under Khanna's leadership, has undergone a strategic shift in the past 12–18 months. The focus has been on mitigating risk while identifying stocks with sustainable earnings growth for the next few years. With many companies boasting growing order books, Khanna and his team have honed in on execution capability as the differentiating factor for future success.
One notable move has been reducing the portfolio’s equity exposure from approximately 85% to 72%, with an eye on seizing opportunities that may arise from market volatility. This more conservative, multi-asset approach ensures a balance between risk and return.
The IPO Surge: What’s Driving It?
The current wave of IPOs, both on the mainboard and SME platforms, has been fueled by a strong bull run in the markets. Khanna sees this as a natural response to the market’s liquidity and investor participation, which has driven up IPO launches. While these public offerings are vital for capital formation, he warns against investor complacency, reminding investors to stay diligent and focused on managing risk amidst the euphoria.
Client Concerns and the Post-COVID Investment Trend
As markets have delivered robust returns since the pandemic, Khanna notes that many investors are eager to protect their paper profits, especially given the recent bouts of volatility. To address this concern, he has noticed a growing interest in more balanced, multi-asset strategies that reduce overall portfolio volatility while preserving gains.
Reflecting on the investment trends over the past four years, Khanna highlights the government’s focus on capacity generation, which has helped sectors like manufacturing, building materials, and defense. On the flip side, consumer sectors have lagged but are now poised to take part in the ongoing bull run.
Advice for First-Time Investors
For those new to the equity markets, Khanna stresses the importance of focusing on risk while seeking returns. Given the stretched valuations in the market, he advises starting with lower-volatility, multi-asset strategies, which can help investors ease into the market without taking on excessive risk.
Performance of Purnartha One Strategy
While Purnartha One Strategy has been in operation for less than a year, its performance has already shown promise. With a time-weighted rate of return (TWRR) of 8.1% and 10.6% over the last three and six months, respectively (as of August 31, 2024), the strategy demonstrates Khanna’s expertise in navigating today’s complex market environment.