Listen to this article
Of late, equity markets have turned quite volatile. FIIs are exiting and geopolitical tensions have added to woes. In such a scenario, what is your outlook on equity markets? And how comfortable are you with valuation of equity markets?
We are seeing slowdown in the FIIs selling in recent days in comparison to last 2 months. World is witnessing geopolitical stress in few nations such as the imposition of martial law in South Korea, collapse of French government, fear of tariffs on exports from Canada, Mexico and China, etc. On a relative basis, this makes India a better investment destination. Recent volatility in Indian equities is due to poor macros and a fallout of lower CAPEX spends. This should reverse in the coming quarters as governments (GOI + states) try to achieve budget estimates related to Capex.
Coming to valuations, it is advisable to look at PEG rather than PE ratio where G stands for growth. India’s PE may appear high on optical basis but adjusted for growth in earnings, it is cheaper than most countries.
Secondly, recent correction in equities has resulted in cooling off of premium valuation of Indian indices versus other emerging markets.
Equity PMSs are similar to MFs. Then why do you think that PMS offer diversification to investors’ portfolio?
PMS are designed for HNIs and UHNIs. Typically, PMS’ take concentrated bets on high conviction ideas.
During heightened volatility, a MF’s fund manager could sell across the board to meet redemption pressure. Under PMS, each investor’s portfolio is unique and will not see selling in case another investor in the same strategy choses to cash out.
Also, in PMS you have non-discretionary service wherein the FM executes trades based on the investor's instructions, which is not possible in any other product category.
In one of your strategies, you have replaced fixed income with gold. What is the rationale for this?
Gold is increasingly playing an important role in asset allocation. In fact, since the turn of the century, gold is the best performing asset class. Gold walks into the portfolio.
What we have done is to keep fixed income outside of this particular strategy. Recent changes in taxation have reduced the attractiveness of investing in fixed income.
We also offer a fixed income fund which caters to investors looking for a combination of interest income and capital gains.
You manage a small cap strategy. However, many believe that small cap stocks have reached their full potential and there is no steam left in this segment. What’s your view?
We disagree that the small cap stocks have reached their full potential. There are greater number of small and midcap companies which are in new businesses. Contrarily, majority of the large companies are in traditional businesses. We firmly believe that new businesses will have brighter future than traditional ones.
Even the FIIs are discerning. If you analyse their activities, it is clear that they are mostly selling traditional businesses and loading up on select non-traditional industries.
How do you see PMS getting affected due to the introduction of the new asset class?
We believe that impact would be minimal as the target audience is different. PMS is best suited for HNIs and UHNIs. In case, SEBI allows the PMS to operate under the new asset class, we would be more than happy to participate.
Many experts say that equity PMS is no longer attractive due to a hike in taxation rate. They say that the new taxation will eat up a major portion of investment returns. On the other hand, debt PMS will become more attractive considering the taxation of listed bonds. What’s your overall view on this space?
MFs do have a tax arbitrage over equity PMSs. At the same time, fixed income PMS have an edge over MFs.
Taxation is important but not everything. The high percentage of MF schemes underperforming respective benchmarks is a sad reality. A portfolio manager, with high conviction ideas, providing returns higher than benchmark is in a position to overcome the handicap of higher taxation.
Secondly, on a post-tax basis, we are confident that equity as an asset class will outperform fixed income assets on a risk adjusted basis.
We agree that PMSs offering fixed income strategies are better off than MFs on a like to like basis.