Investors Need To Watch Two Key Macro Factors, Says Nippon India Mutual Fund's Manish Gunwani

Nippon India Mutual Fund's Manish Gunwani sees a widening trade deficit and a slow rural recovery as key concerns for domestic investors.

These need to be resolved on the domestic front before "you go in fully", the chief investment officer at Nippon India Mutual Fund said in an interview with BloombergQuint's Niraj Shah.

India has already hit a trade deficit of $20 billion or about 2-2.5% of current account deficit. "That is not something which is very healthy," he said.

The rural recovery has also been very slow, he said. "So, whether it’s two-wheelers, fast-moving consumer goods, or microfinance, the growth has not been quite strong."

According to Gunwani, the rural slowdown was anticipated. "A 15-month crisis or a slowdown like what the virus cost, you would expect urban would recover strongly versus rural," he said. The urban balance sheets, especially the top 10-20%, tend to be stronger, he said.

"Even then, whether it is because of fertiliser shortages or lag in government spending, or that their balance sheets took bigger hits in the last 15-18 months, the rural side has not really fired at all," he said. "Since there are multiple reasons, you don’t know how long this will go on."

Growth Vs Inflation

Gunwani considers managing growth as the bigger challenge in India compared to inflation.

Inflation in India is driven by commodities and currently most of these, whether iron ore, aluminum and crude, are 10-30% down from the peak, he said.

According to him, the chances of a big crash may be mitigated by the fact that if inflation doesn’t go up and cost of equity remains steady, then the sectors that return gains will change. "Defensive sectors may still give some return and may outperform if there is a big slowdown, in terms of growth, but I doubt that the market will correct much," said Gunwani.

Key Themes In Stock Market

Gunwani is convinced about the capital expenditure cycle reviving. He expects action in renewables, data centres and telecom equipment.

"But whether we can access it fully through the stock market remains a question," he said. "There are not too many large cap plays, and also, it’s more technology-intensive stuff like robotics and process control where players are there, but mostly (it's) multi-national corporations where valuations are stiff."

According to Gunwani, the pure defensive sectors like information technology, healthcare and FMCG gain. "The more discretionary elements where there will be a lot of margin pressure, even on the capital goods side, could be interesting (too)."

As a value investor, Gunwani sees a good risk-reward in the automotive sector. "If you see across two-wheelers, four wheelers and commercial vehicles, there is value emerging in the sense that there are multiple themes."

He is also upbeat on original equipment manufacturers trying to create value in the electric vehicle space. "The two-wheelers on free cash flow yields are maybe above 5-7% in some cases. I don’t think investors can lose much. But one also needs a growth trigger, so it could be either EVs or exports or something else."

Watch the full interview here: