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MF News ‘Earnings growth can support the markets from here’

‘Earnings growth can support the markets from here’

In a candid chat with Cafemutual, Bekxy Kuriakose, Head of Fixed Income, and P.V.K. Mohan, Head of Equity, Principal Mutual Fund, share their market outlook.
Padmaja Choudhury & Nishant Patnaik Feb 7, 2018

As many investors are caught up in equity frenzy, Bekxy Kuriakose, Head - Fixed Income, Principal Mutual Fund, believes that debt funds should be popularised among retail investors through favourable taxation policies.

The last few months have been a roller-coaster for the debt market. With a sudden fall in bond yields post demonetisation, the key benchmark of debt funds 10-year Gsec has moved up close to 7.57%. We asked Bekxy about her outlook on the debt market. She said that yields are likely to be range bound; however, she advised investors to remain cautious.

Sharing the rationale for this, Bekxy said, “Though rates have risen quite a bit, we believe that RBI will hold repo rate at 6%. However, the government securities may further rise 15-20 bps due to fiscal worries. But we do not see any significant hardening of yields. Also, if the credit growth picks up, we may see pressure on the short-term rates,” Bekxy said.

We get curious about her rate expectation and ask why she thinks RBI will hold the repo rate at 6%.

She starts by explaining how the central bank had retained a neutral stance even when the CPI was hitting multiple year lows. She feels that RBI will not take any hasty rate action. “I do not think that the RBI will cut rates. According to RBI’s inflation targeting, CPI should be in the range of 2 to 6%. RBI will be on a watch mode to figure out whether the CPI will hover around their comfortable target.”

With a tinge of uncertainty, she adds that if the inflation exceeds 6%, then RBI may resort to hiking the policy rate. She adds that the crude breaching the $70 mark would be a key trigger for rising inflation.

CPI inflation is a data point that fund managers actively track. In fact, the recent uptick in the inflation numbers has caused quite a stir among them. But Bekxy is not worried: “The government has always been proactive in keeping prices under control. With the food prices in check, I think that the inflation will be very much contained.”

We now turn our attention to P.V.K. Mohan, head of Equities, Principal Mutual Fund, who has been listening to our conversation with rapt attention.

With the equity markets hitting a new high, we asked Mohan what will be the key triggers for the markets from here. He is quite optimistic on corporate earnings. “Due to the benefit of low base effect, we believe that we should see strong earnings growth in third and fourth quarter of FY18 and this will continue in FY 2019. Although we have seen only disappointments so far, the earnings growth momentum looks better now,” Mohan said. 

We ask him what makes him so confident about the earnings growth. To support his conviction, he said that there has been an increase in demand due to increased consumption. In addition, the increasing capital expenditure and push to the housing sector has benefited many sectors.

Another factor that makes him optimistic on the Indian market is the strong global growth including emerging countries. He says that the strong growth will have a rub-off effect in the Indian economy that will lead to India’s growth with higher foreign and domestic inflows in debt and equity market.   

What about the stock market? Isn’t it overvalued? How difficult it is to find investment ideas at this level, we probed.

He admitted that the market is overvalued. Remember, it is an overvalued market and not a bubble,  Mohan pointed out. He said that though there are opportunities available in the market even now, the pipeline of such opportunities is receding.

Talking about these opportunities, Mohan said, “There can be significant restructuring in the balance sheets of power and construction companies due to regulatory approvals. Also, there are few sectors that can perform better, such as the chemical industry and auto ancillaries,” Mohan added. He earmarks FY 2020 as a turning point for these companies.

Mohan, however, believes that although 2018-19 will be a year of strong growth, it will also be a volatile year, owing to factors such as inflation and tax collections.

Since the AUM of P.V.K. Mohan’s Principal Balanced Fund has increased from Rs.50 crore in January 2017 to Rs.1,000 crore in January 2018, we asked him what contributed to the phenomenal growth. Taking pride in the achievement, he said, “The flavour was for balanced funds in the marketplace, which has been a good tailwind for us. The performance of the fund has been consistently good and that has been a strong pull factor. Both these factors, along with strong sales push, have contributed to the phenomenal growth in AUM in the last one year.”

Mohan then goes on to share how different his balanced funds are from the existing ones: “We believe that superior stock selection is the most sustainable way to delivering outperformance. Our approach to the portfolio construction is a bottom-up strategy with a focus on selecting stocks with strong growth prospects relative to peers and the market, dominant/niche presence in their sectors and trading at attractive relative valuations.”

He goes on to explain that the good part of his balanced fund’s performance over the last 2-3 years has been that it has been driven by an ability to identify good stocks across diverse sectors. “We give great importance to in-house research in identifying investment opportunities, especially when it comes to stocks that could deliver significant alpha. As a corollary to this, we many times research under-researched companies or have a differentiated perspective on stocks we own; at times we are early investors and at times we own stocks not very widely owned by institutional investors,” he added.



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