‘Investors must use correction as an opportunity to add equity’

The fund house believes that in the current environment—where market breadth is improving—bottom-up stock picking is likely to do well and active mutual funds could generate alpha.

This is on the back of expectations that Indian economy, over the next three years, is likely to go back to its real GDP growth trend of about 6.5% with all three drivers of economy namely consumption, investments and exports ‘firing’.

This is expected to result in corporate earnings growing at a 15% compounded annual growth rate over the next three years, which is higher than the long-term average.

Commenting on the valuations, the note stated “given depressed earnings and high liquidity, valuation multiples for Indian equities are elevated. However, 2022 can be a year of transition as excess liquidity gets withdrawn and interest rates inch up. Hence, valuation multiples can be expected to normalize.”

Digital transformation, corporate banks/fintechs, cyclical revival in real estate, consumer discretionary and the rise of domestic manufacturing are considered to be key sectors/themes of interest, going ahead.

However, in the short-term, investors need to be prepared for modest returns,the report said and highlighted that market action may be more stock-specific.

For first-time investors, the firm suggests balanced advantage funds in equities that have the potential to provide reasonable returns compared with fixed income with low volatility.

When asked if an investor would be better off taking exposure to a diversified index fund with sector rotation, one of the themes of the market going ahead, Balasubramanian, managing director and chief executive officer, ABSL AMC, said, “index-based investing will definitely help in participating in the market, but with significant growth in the ETF in global markets and too much money going to some set of companies may lead to disruption in valuation, and this has to be kept in mind.”

The firm believes that the volatility in the fixed income space will be higher than what we have seen over the last 12 months.

Stating that the central bank’s focus remains on financial stability and growth over inflation, the Outlook conveys that the reversal from the extraordinary accommodation will happen in a calibrated manner.

The fund house expects a maximum of two rate hikes in 2022 against market expectations of three.