Avinash Satwalekar on Markets, Oil & Top Sectors | Largecap & Midcap Outlook

Good morning, Survi. Thank you very much for having me and absolutely look forward to making this a regular feature with you.

So let's take a look at the markets itself, right? I mean, if you're looking at what's happening with oil, that is a real important cue to tell you where traders are expecting the economy to go. Now, if we assume, I mean, our working assumption is you're looking at a $90 oil on average. That's 30% above pre-war level. So if you're looking at the last few days, the excitement around oil should be an indication of where we think the economy is going to be going at a global level. Your question about, you know, investor behavior is actually really pertinent, you know, and it's something that we track a lot at Franklin Templeton. In fact, earlier this year in January I did an investor awareness drive through the country. I drove from Kanyakumari to Kashmir. So it's about 4,100 kilometers in 30 days and the idea was to try and understand what investors are thinking and to build awareness for women in Bharat. And I'll tell you that sentiment what you're talking about is very similar across the board. I mean there is a little bit of concern around it, there's awareness around mutual funds but the idea of what an investor should be doing is very simple. You need to stay calm in an environment that's extremely volatile. That's the first and foremost thing because emotions play havoc. Second thing is to focus on your long-term goals. Those are what's going to help you build wealth. And that's different from being rich. And lastly, you've got to be non-stop with SIPs. And the reason for that is SIPs were structured precisely for these kind of volatile markets. So if you've got, I mean it's really good to see a green day, when you mentioned that earlier. But that doesn't mean you're going to have green days all the time. You're going to have some volatile because we are in the midst of a war as you mentioned. So there is going to be volatility. It's a function of how we deal with it as investors. That's critical. So in our mind there's a lot of different opportunities that volatility can bring to you. That's what you have to be ready to take advantage of. So if you're talking about lump sums growing, increasing, I would be more in favor of an STP even if you're doing lump sums. And the best is obviously an SIP.

Yeah. So I don't think, you know, when the war is going to end, right, obviously none of us knows that. So the idea, I mean the way we've looked at it is kind of the same thing that we talk about for our investors. You've got to be ready to take advantage of the volatility. So have we been peeling into certain things? Have we been slowly and gradually increasing positions and names that we like? Absolutely. So if you look at valuations and you mentioned that across the board valuations have come off a little bit. So if I look at large cap valuations they are now at about the long-term average around 18 times. Midcaps and small caps are still above their averages. But having said that, you have to go where there's going to be growth. So is it completely unjustifiable for valuations to be high? No. Provided there is growth. So that's the key factor for us. And I think what we're seeing now exactly is what you pointed out. There are certain sectors where we are going to see certain advantages and that's where we're focused on. So sectors like that are domestically focused that can be a little more of a buffer when you are dealing with a global crisis something like a healthcare sector or if you're looking at capex where infrastructure spend continues to be a domestically driven initiative those are areas that will be slightly buffeted from a global kind of meltdown that we're seeing across the board. Now there are obviously going to be sectors that do get impacted by this and whether that is airlines or tourism sectors that's where you want to be a little more cautious as you're going forward but we are definitely taking advantage of this volatility to expand positions where we have conviction and that's exactly what I think most investors should be doing even in their mutual fund allocations.

Yeah. So, you know, it's funny you mentioned financials because we've been taking a look at that and seeing how that sector in particular has been, I'd say, disproportionately getting impacted. We are long-term investors. We've always been long-term investors and at the core of any economy, you need a strong financial system and our financial system is actually very strong. So the question is are we believers in the longer term growth of the Indian economy and if that is the case we are going to have a very upward lift to the financial services sector, especially the banks. So I don't think anything has changed in terms of our assessment of what that long-term growth looks like for India. Now yes, you could have a little bit of a shift. You will definitely have some impact on inflation, you'll have some impact on maybe instead of getting 7 plus% growth. It might shave off a few basis points here and there. But the longer-term growth trajectory for India's economy is not necessarily going to get derailed by this. Now our working assumption obviously is that this is not going to be a long drawn out war and it is going to, as you rightly predicted, it is going to end next week. So I think if that's the working assumption then we want to take advantage of what we think are going to be longer term and so I think the banking sector in general is one of those long-term beneficiaries for an economic growth that we still believe is going to be in this 7% range.

Correct. So I'll give you two things. One especially since you brought up oil, right now oil, you're right, the fact that I think our expectation is that it will stabilize around $90. Now, if it stabilizes around $90, that is 30% above pre-war levels. So, will that have an impact on us? Of course, it's going to have an impact on us because we still import and we are still dependent on oil. But oil dependency for India has come down 27%. So if we're looking at let's take a unit of GDP that required let's say 100 rupees of oil to create a unit of GDP growth today it requires nearly 30 rupees less so it requires only 70. So our oil intensity as an economy has come down. Now on your second thing around how investors should be positioned I completely agree that you need to have diversification so it never makes sense to put all your eggs in one basket. You need diversification across the board. Even if you are equity biased, you cannot not have other asset classes. So I think last year was a perfect example that taught us that you do need that diversification to a great deal. So we are still of the belief that having a balanced portfolio, having a hybrid portfolio is critical. Whether that is through a balance advantage fund or whether that's through a multi-asset fund, those are categories that actually give you that diversification and I still believe that debt funds provide a shock absorber for your portfolios and that should not be ignored. So that's why I think multi-asset funds actually make a lot of sense because you get a little bit of all of that and the main thing you want to do is absorb shocks and that's exactly what we're going through right now and that's what a portfolio and a multi-asset or a balance or a hybrid overall will do for you and we still believe that that is probably the best way forward especially when we are in such a volatile period.

I think, I mean like I said, diversification is important. You need geographic diversification as well. So a certain allocation to the US markets also makes sense. But I will reiterate one thing when I look at kind of final advice is to kind of reiterate what I said earlier which is stay calm. I think having our emotions in check is going to be the most important thing for us to deal with because yes, we're seeing a green market today and we're happy and we're all feeling a little better, but there were, I mean last week you, I mean I'm sure you were feeling the same thing that just red and big red moves down creates a whole lot of emotional disturbance and the idea is to stay calm and the only way to do that is to focus on the long term. So you got to stay calm, focus on your long-term goals and then keep investing regular. Do not change that. Make it almost mechanical because that's what helps you longer term because you need to average down because there's no crisis that we've ever had in the markets where 1 year, 3 years, 5 years out the markets haven't been up. So you just have to look at history and that will give you the confidence and conviction.