You started your career as an equity dealer and now you are the CIO. Can you share with us some of the lessons that you learned in this journey?
I started as management trainee and was initially exposed to all facets of the business including fund accounting, handling customer interaction, dealing with custodian and so on.
In investing, one is always learning and the market is a tough teacher. Mutual fund investing is about ensuring the client meets his goals. For this, one has to ensure that medium term performance is maintained, and portfolio construction is as important as stock selection. Portfolio alpha earned on the upside has to be preserved in tough market conditions.
What do you think is driving the market rally and what could derail it?
The strong performance of the equity market over the past three years has been driven by many factors such as
- the better growth of the Indian economy in relative terms as compared to rest of the world,
- steady macroeconomic factors and a stable to stronger currency,
- expectation of steps by the government to improve ease of doing business leading to likely cost efficiencies for companies,
- low interest rates globally,
- the growth of the mutual fund industry as a transparent vehicle for investing and other factors like demonetization, which led to lower domestic interest rates. These factors led to strong fund flows into equity markets.
Factors that could derail the rally would be weak recovery in earnings, sharp rise in global interest rates and adverse macro parameters for India.
What is your outlook for equity and debt market for the next two years?
While the markets have done well, India has been about bottom up stock selection, which is why active management has usually done well. There has been substantial multiple expansion while earnings growth has been slow. We think that the markets will gradually move up as earnings come. However, Indian companies’ return ratios should improve as they have not added to their equity base (and have actually reduced debt) so any improvement in profitability will help.
In debt, RBI’s monetary policy will continue to be centered on inflation targeting and given evolving macroeconomic scenario our baseline estimate is for an extended pause on key rates in 2018 and RBI to maintain neutral stance. Any pick-up in growth towards second half of 2018 if it translates into higher inflation can lead to a hike in key rates. Banking system liquidity conditions would be tighter (towards neutral zone) going forward as the liquidity overhang from demonetization is drained away. Pick up in bank credit by PSU banks and tighter liquidity conditions can lead to higher short term rates in next two years. We expect government to maintain their commitment towards meeting fiscal targets and manage borrowing while ensuring rates remain supportive of growth.
In recent times, while FIIs has been on the selling side, domestic institutional investors are buying. Does this indicate that FIIs have sensed some risk to the Indian growth story? What are your views?
FII selling may be a result of portfolio rebalancing as India has become relatively expensive compared to other emerging markets and FIIs are overweight India. Also, as commodities have rallied, there could be some shift of foreign portfolio investment to commodity producing countries.
Corporate earnings seems to be a major concern. What are your views?
The markets expect index earnings in the low teens for FY 18 and a meaningful growth in FY 19. For this, the second half earnings in FY 18 are key. Of course, the low base effect should help, but the markets would watch for quality of earnings. Our sense is that earnings should be in line.
Most of your funds have higher exposure to the automobile sector. What is the rationale for this?
This is a space where consumer demand has held up and growth has been consistent. We have seen good volume numbers in passenger vehicles and of late, in two wheelers as rural demand has picked up. The volume numbers for commercial vehicles also have shown an improvement. These are high quality companies with good management, having global scale and a stable business model with little surprises if the demand is taken care of. All of these have led to our portfolios being overweight in autos.
Which sectors do you think will play out well in the near future?
While we like domestic cyclicals (cement, autos, construction, etc.) as sectors, we think that the performance of companies will be more granular with meaningful difference in companies across the same sector and stock picking would be key. In other sectors, the pharma sector has had challenging times and some companies are available at fair valuations.
What are your views on the SEBI circular that says that each fund house can only have one scheme in each category? What are the challenges for the industry?
The circular will at the least do two things, simplify the categories of schemes for the investor and lead to apples to apples comparison in funds across the same category as different funds had different investment mandate/ limits depending upon when they were launched. As a fund house, we have always believed in having few products and focusing on them rather than spread ourselves too thin across various funds. Hence, we will have to make limited changes only.
What would you tell advisors at this point of time?
Maintain the long term asset allocation in line with the investor’s risk profile (between debt: equity), within equity balance the exposure between large and mid-cap funds, but be prepared for large substantial volatility. However, investors who are under invested in equity may come in using SIPs as markets can remain expensive.