Expert view: Mittul Kalawadia, Senior Fund Manager at ICICI Prudential AMC, says it can’t be said that the worst is behind for markets unless the US-Iran conflict is completely over. In an interview with Mint, he said he is closely watching key macro triggers, including liquidity and how bond yields evolve globally and on the domestic front, the rupee’s trajectory, as they will dictate the market trend. Among the sectors, he is positive on banking and certain pockets of discretionary consumption. Edited excerpts:
Is the worst behind for the markets? Should we not be worried about the second and third-order impacts of higher oil prices?
Whether the worst is behind the markets is difficult to say unless one is certain that the US-Iran conflict is completely over.
At this stage, that certainty does not exist. If the Strait of Hormuz does not fully reopen, then it is premature to conclude that the issue is behind the markets.
Beyond the crude oil price itself, what is critical is the availability of products derived from crude, as they are integral to the global supply chain. Equally important is the duration for which oil prices remain elevated.
If higher oil prices persist for only three to six months, it is unlikely to pose a major challenge, as the market is most likely to look through short-term disruptions and focus on the longer-term outlook.
However, if the view emerges that oil prices will remain elevated for more than a year, then there could be further downside. In that case, the second and third-order effects of higher oil prices would become much more relevant for both earnings and valuations.
Where are you currently finding better risk-reward opportunities?
Banks are an attractive pocket where valuations and growth expectations are reasonable.
Certain pockets of discretionary consumption also look relatively attractive. In addition, parts of the anti-crude basket, such as cement and manufactured goods exporters, offer reasonable valuations and therefore appear interesting from a risk-reward perspective.
SEBI’s Specialised Investment Fund (SIF) framework is being positioned as a bridge between mutual funds and PMS/AIFs. What specific investor gap do you think this structure solves in India today?
From an investor’s perspective, SIF solves the challenge of providing a product structure that is unconstrained in nature.
Under SIF, there is greater flexibility in investing across market capitalisations, asset classes, and instruments.
This allows a fund manager to construct portfolios more dynamically and potentially deliver better outcomes over the long term.
However, an aspect that investors should be mindful of is the associated risks and how they are managed.
Greater flexibility can be used either to take on more risk in pursuit of higher returns or to reduce risk and generate superior alpha over the medium to long term.
In that sense, SIFs can cater both to investors who are comfortable with higher risk in pursuit of higher returns and to those looking for lower-risk solutions with better risk-adjusted outcomes.
What is your view on Q4 earnings? Should we brace for weak earnings in the next two to three quarters?
From an earnings perspective, the next one or two quarters are likely to be challenging, either on the margin front, the revenue front, or both.
If the Strait of Hormuz disruptions persist and the outlook remains negative, weaker earnings will weigh on company performance and stock prices.
On the other hand, if Hormuz reopens and concerns ease, investors may look beyond short-term earnings weakness and focus more on the medium-term outlook.
There are speculations about the start of monetary tightening globally. If global liquidity tightens again, which pockets of the Indian market do you think are most vulnerable?
Every segment of the market carries some degree of risk. However, the larger vulnerability is in those names where valuations are expensive, and narrative is a large part of the investment thesis.
These are areas where expectations for earnings growth are high, and valuations have already discounted significant future optimism.
Such segments tend to be impacted the most during liquidity tightening events. In the current context, sectors such as semiconductors, companies that have benefited from the AI-related ecosystem, and defence as a theme are areas where valuations have become expensive.
How does the iSIF Equity Long Short Fund differ from a traditional flexi-cap fund?
The key difference lies in the flexible use of derivatives. This flexibility allows the fund manager an additional tool to manage portfolio risk effectively, and in a range-bound market environment, this can help enhance the ability to generate alpha.
Furthermore, it allows us to hedge the portfolio more efficiently when markets appear overheated or near cyclical peaks.
These capabilities help lower overall portfolio risk and volatility over the long term. As a result, the fund aims to deliver better risk-adjusted returns and potentially superior alpha generation compared with a traditional approach.
Your framework references macro indicators like crude oil, US bond yields, Fed rates and CAD. Which of these variables worries you the most right now?
At present, we will watch out for liquidity and how bond yields evolve globally. On the domestic front, we will closely track the currency trajectory. While the current account deficit is important, if the currency remains stable, the overall level of CAD concern reduces significantly.
Long-short strategies have traditionally been associated with hedge funds and sophisticated investors. How are you adapting this framework within a mutual fund-regulated structure?
Different fund houses have adopted different approaches to long-short investing.
One approach is to replicate a hedge fund-style long-short strategy. The strategy we intend to follow is more in line with a flexi-cap or diversified portfolio structure, which we believe is better suited for investors with a long-term investment horizon.
Through this offering, the aim is to provide a solution that allows investors to remain invested in a single fund over a longer time horizon. The fund itself can make adjustments to market-cap allocations, sector allocations, and market exposure.
In that sense, this strategy is designed for long-term investors who can stay invested while the fund dynamically adapts to changing market conditions.
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Disclaimer: This story is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
