Mr. Neelotpal Sahai
Head of Equities, HSBC Asset Management, India
Neelotpal Sahai is currently Head of Equities and Fund Manager since September 2017. He has been a Senior Vice President and Portfolio Manager in the Onshore India Equity team in Mumbai since 2013, when he joined HSBC. Neelotpal is responsible for managing three HSBC Mutual Fund equity funds.
Neelotpal has been working in the industry since 1991. Previously, Neelotpal was Director at IDFC Asset Management Company Ltd in Mumbai, responsible for equity fund management, and held a variety of positions at Motilal Oswal Securities Ltd. In Mumbai, Infosys Technologies in Mumbai, Vickers Ball as Securities Ltd. In Mumbai, SBC Warburg in Mumbai, UTI Securities Ltd. In Mumbai and HCL HP Ltd. In Mumbai. Neelotpal holds a Bachelor’s degree in Engineering from IIT BHU–Varanasi and a Post-Graduate Diploma in Business Management from IIM Kolkata, both in India.
Q . Huge volatility is making everyone, especially new investors, extremely nervous. Do you think investors should be prepared for more volatility in the coming days?
Answer : We expect market to remain volatile in the near term on back of heightened uncertainty coming from inflation, resultant central bank policy actions, growth moderation and volatile input prices driven by geopolitical conflict. Many of these factors are inter-wined with each other and has increased the macro uncertainty at a global stage. This background casts a shadow on equity as an asset class, as these variable could adversely impact both drivers of equity performance viz valuations (given rising interest rates) and earnings growth (slowing demand & inflation). Additionally, India is highly sensitive to global crude oil prices and that remaining elevated has implications for the country both in terms of imported inflation and fiscal / external balances. So with the outlook for crude oil prices to remain higher in the near term, that concern may not ease in a hurry; however, we believe uncertainty creates opportunity and hence our advice to investors is to look through this volatile period and focus on medium terms earnings growth trajectory which, we expect to remain strong driven by investment cycle.
Q . What are your views on inflation and rate hikes both on the domestic and global front?
Answer : HSBC Global Asset Management ‘s (AMG) view is of 325bps US Fed rate hikes in 2022. Globally, major central banks are expected to continue with the rate hikes till there are clear signs of inflation slowdown.
Having said that, on inflation front, we may be closer to peak inflation (or even past peak inflation)., We are already witnessing moderation in prices of all commodities including oil. During the past 2-3 months, prices of natural gas, base metals, agri commodities, precious metals have all corrected and we are also seeing a moderation in global crude oil prices, as we speak. The correction in prices may largely be demand led, as even though China demand is expected to rise from their slump levels, global consumer demand is waning after the post-pandemic surge. The other key variable, which was the driver of inflation; the global supply chain side pressures, which was accentuated by the geopolitical crisis. While the geo-crisis still lingers on, slowdown in demand can have an easing effect on this front as well. So this could mean that we are closer to peak inflation (or even past peak inflation), which would mean that somewhere over the next 9-12 months, growth and not inflation would come back as priority agenda for policy makers worldwide. This could also mean that interest cycle could see an end game by early to mid-2023 itself.
Q . There is a general consensus that RBI will hike rate over the next couple of policies. A higher interest rate would hit the profitability of companies. Does that mean investors should lower their return expectations in 2022?
Answer : It’s a difficult question to answer but let me spell out our base scenario. Let’s look at what has transpired in Indian markets so far. If you look at Nifty performance since the peak in oct-2021, Nifty has corrected by 12%-odd while the earnings change in the same period has been positive implying that the correction is driven by valuation contraction. The key reason for the multiple correction both in India and globally, is the rise in yields and expectation of an interest rate hike cycle by central banks worldwide. This coupled with liquidity withdrawal in a post pandemic normalization process, has hurt equity valuations adversely. India has also shown a similar path of valuation moderation. Till the time, the interest rate hike cycle marches on and the end game of inflation not yet being ascertained, the pressure on multiples are likely to remain in the interim but peak of the multiple contractions is already past us.
Fundamentally, higher interest rates have two set of impact on corporate earnings; one is a direct impact on earnings as interest cost increase and the other one is second order demand impact as high ticket discretionary spends become expensive affecting demand. Having said that, corporate India balance sheet is in much better shape as there has been material deleveraging over the last 5 years. This reduces the impact of higher interest rates on corporate India’s earnings on relative basis. In terms of impact on demand, what we are seeing so far is that demand in auto (PVs and CVs) and real estate has not seen moderation. This could be on back of auto volumes at cyclical lows and affordability in real estate is much better as compared to past.
As discussed earlier, there is a high probable scenario of interest cycle could see an end by mid-2023 and gradual pick up in global growth over the course of 2024-25. Equity markets typically price in such a scenario faster than the actual event and peak of the inflation / interest rate hike cycle, would be taken as the positive indicator in this context. So, if this hypothesis is proven true, then markets can start to rebound sooner than later.
Q . Which attributes are non-negotiable for you when picking a stock? Are there any sectors or industries you completely stay away from?
Answer : Our investment framework looks for scalable businesses where there is a competitive advantage whether its structural or industry-cycle led with strong balance sheet, consistent cash flows and return on capital higher than cost of capital. We look for efficient capital allocation which has been fair to minority shareholders.
One critical aspect of our investment framework which is non-negotiable is corporate governance. Companies faltering on this front gets filtered out in our framework. We avoid companies where minority shareholders’ interest are not in par with majority shareholders.
We look for each sector on its merit and invest based on its qualification in our investment framework stated above.
Q . What would be your advice to a budding stock investor who wants to build wealth through the market? What would be the top dos and don'ts?
Answer : For a budding investor, the preferred way to enter equity markets will be through the MF route under the guidance of a certified financial advisor. That will ensure professional guidance, diversification through a MF portfolio and alignment to individual scenarios (risk appetite, investment horizon, goals etc.). Direct equity investment entails higher risks as it increases concentration risk, need constant monitoring, in-depth research skills /expertise, traverse volatile cycles and time commitment. So for professionals, business persons and self-employed individuals, there may not be enough time to spare for following a disciplined process for investing through the direct equity route. Hence, MF should be the best way to create wealth over the long term. Employing a financial adviser will help as they are better equipped to take the allocation call within MF categories, given the understanding of their clients’ asset allocation requirement, risk appetite and investment horizon.
Key dos - Seek advice from a certified financial adviser, undergo a financial planning exercise & initiate investments through MFs as it will help in diversification, professional management and ensures a disciplined route to investing (SIP)
Key don'ts - Avoid following social media advice, speculative forwards, herd mentality for investing decisions (i.e. investing without proper research), short term focus on investments, too much concentration, not aligning investment decisions to personal goals
Source: HSBC Asset Management, Data as at 30 June ’22 unless otherwise given.
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