The current inflationary scenario poses a threat to earnings recovery, says Vinay Paharia, Chief Investment Officer of Union Asset Management Company, while also cautioning that right now is not the time for lump sum investments into pure equity.

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Speaking with CNBC-TV18.com in an interview, Paharia also urged investors to park their excess savings in asset allocation products and elongate their investment horizon while reducing their prospective return expectations.

Here are the edited excerpts:

Q. There have been regular sell-offs in the market of late, particularly in midcaps. What are you reading into this trend?

We follow the fair-value approach for judging the market valuations. As per our research, Nifty is trading at a significant premium to its current fair value, implying the markets are expensive and have borrowed some returns from the future. We are observing such premium valuations across large, mid and small cap categories. Hence, some correction in valuation is natural.

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Q. Which are the businesses that you are bullish on? Which ones would you avoid?

We are bullish on Information Technology, Telecommunication and Industrials. We feel that the pandemic has improved the business potential in some of these sectors. We expect the future fair value growth for various companies in these sectors to be strong and find valuations reasonable.

We are underweight Materials and Utilities sectors as we believe that the risk-reward is unfavourable for companies in these sectors.

Q. Inflows into SIPs have been steadily on the rise. Are mutual funds being swamped with more money than what they can handle, especially given high valuations?

Wallet share of high-yielding and risky investment options within the household financial savings in our country is still well below the global average. So, in that context, the steady inflow in the mutual funds industry is in line with broader economic expectations.

It is true that rich valuations are currently a challenge for asset managers. Hence, we are urging investors to (1) park their excess savings in asset allocation products, (2) elongate their investment horizon and reduce prospective return expectations.

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Q. Many companies are complaining about rising raw material costs. What kind of an impact do you see this having on the stock market, as well as on the broader economy?

The current inflationary scenario at the level of input raw materials poses a risk to the near-term expectations of earnings recovery. We may also witness an unexpected rise in consumer inflation if the situation persists. However, we believe that these issues will be resolved in the medium term (6 to 12 months) and its impact on long-term fair values of affected businesses will be limited. Nonetheless, we are monitoring the situation closely.

Q. What is your thumb rule of investing at this juncture when volatility is high, equities look expensive and fear of policy normalisation, sticky inflation and high energy prices pose as near-term risks?

As mentioned above, we believe that current market conditions are unfavourable for lump sum investments into pure equity. Hence, we are urging investors to (1) park their excess savings in asset allocation products, (2) elongate their investment horizon and reduce prospective return expectations.

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Q. What would your advice be to mutual fund investors at this point?

We believe that investors should invest across different asset classes based on their risk appetite and in accordance with the advice from a professional investment advisor.

(Edited by : Ajay Vaishnav)

First Published:Nov 16, 2021 10:37 PM IST