ETMarkets Smart Talk: Structural growth story makes India a favourite EM for global investors: Rahul Baijal, HDFC MF

The volatility in Indian equities may continue over the next 3-6 months, but clarity on the inflation outlook, the war situation in Europe and interest rate cuts could turn things positive for the asset class in 2023, says Rahul Baijal, Senior Fund Manager – Equities at HDFC Asset Management Company

In the long term, however, earnings growth will be the key factor that will decide the trajectory of the Indian equity markets, Baijal said in an interview with ETMarkets. “On that front, India is well placed due to the structural attractiveness of the growth story which places it as one of the favourite emerging markets for the global investors,” he said. Edited excerpts:

Have your investment decisions taken a hit amid the recent volatility that Indian markets have experienced over the last few months? Have you increased your cash levels in HDFC Top 100 Fund?
Volatility comes and goes in equity markets. In a volatile market, it is given that some of the investments will get impacted.

However, on an overall basis, given the portfolio positioning of the fund, it has done relatively well compared to markets.

The outperformance can be attributed to the investment style which focuses on stocks/sectors that are expected to deliver earnings growth over the medium term and are available at reasonable valuations.

We don’t take cash calls in the fund and we build portfolios with a medium to long-term view.

We will try to use volatility to our advantage by adding ideas which we like and where valuations also get more attractive.

We are almost nearing the end of 2022. How do you expect 2023 to pan out for equities as an asset class keeping in mind the current domestic as well as global environment?
2022 has been a challenging and eventful year for the markets. Higher inflation globally, Ukraine-Russia war, “higher for longer interest rates” narrative are some of the factors that have led to heightened volatility in the markets.

However, over the medium to long term, we believe equities as an asset class, tend to deliver returns in line with the earnings growth of the companies.

Going forward, volatility may continue over the next 3-6 months based on news flow on global issues mentioned above.

As more clarity emerges on improvement in inflation outlook, war situation in Europe, visibility on rate cuts in 2023, that should be positive for equities, as an asset class.

In the long term, we believe that the earnings growth will be the key factor that will decide the trajectory of the Indian equity markets, and on that front, India is well placed due to the structural attractiveness of the growth story which places it as one of the favourite emerging markets for the global investors.

In the current scenario where several uncertainties and unknowns prevail globally, there are some downside risks to commodity-exposed companies’ earnings growth. So, what sort of a portfolio would you recommend investors wherein the risk reward is favourable?
Investors should focus on portfolios whose investment strategy revolves around buying good quality, fundamentally strong businesses which are available at valuations that justify the medium-long term earnings growth potential of a company.

Also, focus should be on funds that take active positions in a controlled manner and have a strong risk management framework.

Further, in an uncertain global environment, it would be prudent to be very selective on companies whose revenues are linked to growth of global economies and consider funds that are more focused on domestic facing sectors.

Commodities like steel are not expected to do well in an environment of slowdown in the US, Europe and a weakening real estate cycle in China, in our view.

Can you highlight the key drivers for the growth in the NAV of HDFC Top 100 Fund over the last say 5 years?
The fund has generally been overweight in sectors with prospects of earnings recovery and reasonable valuations, and underweight in expensive sectors.

The overweight position in financials, industrials, energy and underweight position in consumer stocks and materials has worked well for the fund over the last few years.

What differentiates HDFC Top 100 Fund from those of peers in the same category?
The investing style is a blend of GARP (growth at reasonable price) and value. The fund has an optimally diversified portfolio.

In stock selection – focus is given on quality of business models, management and financial metrics. While doing bottom-up stock selection, a lot of attention is paid to companies’ positioning and trends in the business, sector and valuation cycles.

It also takes a few high conviction calls on sizing vs benchmark, based on opportunities available and attractiveness of risk-reward.


Though midcaps are a part of this fund, the exposure is quite limited. Have you not considered increasing the exposure given that several strong candidates have emerged for investment from an earnings growth as well as valuation perspective?
As per the SEBI mandate, minimum 80% of the assets need to be invested in the largecap companies. Exposure to midcaps and smallcaps is capped at 20%.

Our current approach in HDFC Top 100 Fund would be to maintain midcap exposure in the range of 5-15%, but not exceed 20%.

Current exposure to midcaps is ~8% in the fund. We will look for attractive bottom-up opportunities in the midcap space.

This strategy is in line with our investment philosophy of maintaining a disciplined approach of looking for quality companies at reasonable valuations.


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)