ETMarkets Smart Talk: Harshad Patil on what to avoid in a rising rate environment
Synopsis
"It would be prudent to avoid the rate-sensitive sectors in a rising interest rate environment. However, given the current valuations of specific sectors, we would like to look at stocks individually, considering all factors such as demand environment, earnings capability, and valuations before taking a call on the stock," says Tata AIA Life Insurance CIO.
Our portfolio approach has always been bottom-up stock selection based on fundamentals and valuations, irrespective of market movements and volatility.
We believe that consistently adhering to this approach across market cycles has helped us deliver superior risk-adjusted long-term returns to our esteemed policyholders.
Unlock Leadership Excellence with a Range of CXO Courses
Offering College | Course | Website |
---|---|---|
Indian School of Business | ISB Chief Digital Officer | Visit |
Indian School of Business | ISB Chief Technology Officer | Visit |
IIM Lucknow | Chief Operations Officer Programme | Visit |
The Monetary Policy Committee (MPC) of the RBI had an off-cycle monetary policy review meeting in May and announced a surprise repo rate hike of 40bps, nudging the repo rate to 4.40%.
This measure was intended to re-anchor inflationary expectations as well as wind down the ultra-loose monetary policy which has been in place since the start of the pandemic.
While the rate hike was a surprise, the market has been expecting higher rates this fiscal and would see it as a frontloading of rate hikes and would closely watch the pace and the quantum of further hikes from the RBI this fiscal.
Stocks Recommendations
We could see heightened outflows from FII as the US hikes treasury rates.
However, the Indian equity markets have outperformed key global equity markets on the back of steady DII inflows that have broadly matched the FII outflows, indicating sustained domestic retail participation.
In a rising interest rate environment – should one tweak their portfolio. What is the ideal asset allocation strategy?
It would be prudent to avoid the rate-sensitive sectors in a rising interest rate environment. However, given the current valuations of specific sectors, we would like to look at stocks individually, considering all factors such as demand environment, earnings capability, and valuations before taking a call on the stock.
What is your view on some of the beaten-down sectors in the last one month – IT, Realty, and telecom? Do they fall under the category of value buy?
We look at stocks on a bottom-up and not on an overall top-down sectoral basis. Certain sectors offer long-term potential, such as the trend of continued growth in IT spending globally, especially in digital and cloud technology, which the Indian companies are well-posed to capitalise on for registering long-term profitable growth.
What is your take on the small & midcap space? The broader market outperformed in the recent months? Will the performance get impacted in a rising interest rate environment?
The small and mid-cap stocks tend to take a bigger hit in any fall in the market. Also, during times of rising interest rates as well as input cost pressures, there is a preference for market leaders as they have a better ability to cope with the volatile environment.
Should investors reconsider investment in high leverage or growth companies? What is your view?
Investors need to be aware of their investments in high leverage companies during rising interest rates.
However, the current leverage position in many companies is not alarming, and the demand environment, too, doesn’t cause much worry in the near term.
While growth companies too would be impacted given the volatile times, we believe that if valuations of these stocks correct meaningfully, we should be seeing pockets of opportunities emerge in this space.
What is your advice to the people investing in life insurance?
As our policyholders invest in life insurance plans to meet their long-term financial goals, they would see through the market correction and average out the market volatility by periodically investing in the renewal premiums.
As they invest in insurance plans for multi-decadal core financial goals such as retirement and children's future, the market corrections offer opportunities to policyholders to accelerate the journey to reach these goals.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)