MF CIOs see weak case for equity mkt next 1-2 years, recommend debt

Informist, Thursday, Dec 22, 2022

MUMBAI – Chief investment officers of fund houses expressed negative sentiment for returns from equity markets in the next couple of years, and say that short-term money must move to debt investments and not equities.

The CIOs were speaking at Business Standard BFSI summit today.

"Our house view is negative on equities because valuations are way too high," said R. Srinivasan, CIO-equities at SBI Mutual Fund.

According to PPFAS Mutual Fund’s CIO Rajeev Thakkar, short-term money should not be in equities since there will be a significant time correction in stocks.

The equity market has entered into a corrective phase and is further stepping into an uncertain period in 2023, said Mahesh Patil, CIO at Aditya Birla Sun Life Mutual Fund.

S. Naren, CIO at ICICI Prudential Mutual Fund, said, "Today, we are telling people to invest in debt," in terms of short-term asset allocation strategy.

There was a near consensus among the CIOs that equity markets would not be the best place to park short-term funds for investors.

"Our fund house applied three main criteria of corporate earnings, valuations and sentiments and while macro drivers were positive for corporate earnings, the other two factors did not portend well for the equity markets in the next couple of years," said SBI MF's Srinivasan.

With rising interest rates and better returns from fixed income investments, equity markets will face competition not seen since the last 20 years.

Low to very low interest rates had pumped up liquidity in the financial system worldwide during 2001-2021 and the markets were "facing consequences now with the central banks now committed to providing real interest rates to savers", said PPFAS MF's Thakkar.

"For 13 years, you had no competition to equities because of printing presses (printing of money by central banks)," said ICICI Prudential MF's Naren. "But now, the Fed (US Federal Reserve) is not going to print money," he said.

This, along with the fact that interest rates were kept very low by central banks, the high liquidity in the world's financial system chased equities for higher returns. But with the situation changing now, and with deposit growth rate lagging credit growth, money will not flow into equities easily.

Stocks whose price-to-earnings ratios were just 8-10 had seen the same shoot up to 80-100 times in recent times, raising overvaluation risks for investors.

According to PPFAS MF's Thakkar, the time correction he expects for the next couple of years will mean that stock prices will "go nowhere while corporate earnings catch up".


The mutual fund CIOs said the government could consider bringing down the capital gains period to one-two years from three years for investment in debt mutual fund schemes to attract higher inflows and indirectly ensure availability of adequate money by banks and companies in whose debt securities the debt funds would invest.

This would lead to a level playing field since equity fund investments attracting capital gains tax only if the holding period was less than a year.

The time is ripe for rationalising the capital gains taxation threshold to two years or one year for debt funds and do "what is right for the investors", said Lakshmi Iyer, chief executive officer at Kotak Investment Advisors.  End

Reported by Rajesh Gajra

Edited by Avishek Dutta

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