What is your market outlook for this financial year?
Markets grappled with uncertainty due to high oil prices, Lok Sabha elections, Fed’s interest rate policy and US – China trade war last fiscal. Currently, majority of these factors have turned in favour of India. Oil prices are currently benign, the central government has been re-elected with a clear majority and US Fed has adopted a dovish stance.
With majority of the key concerns turning positives, we are likely to see more investment opportunities as economy picks up.
Isn’t the stock market overvalued? How difficult it is to find investment ideas at this level?
I would not call it difficult. However, the opportunities are present in a narrow bucket. Of the three main verticals of the economy, exports are struggling from global services slowdown and US China trade woes. The infra and manufacturing space is still recovering from the over investment of the last decade. Majority of the opportunities are present in certain pockets of consumption.
The general expectation in the past has been that equity funds deliver 15% returns over the long term. Though we have seen such returns in the past, we all know that past performance does not indicate future returns. In such a scenario, what would be the reasonable return expectation from equity funds over the next 15 years?
While equity market returns are uncertain, they tend to be more predictable over long term compared to short term. Over long term, equity market returns tend to be aligned with growth in nominal GDP. Unlike the previous 15 years where we saw high inflation and consequently high interest rate, with benign inflation, the nominal GDP over a long term is likely to be in the range of 11-12% (CAGR). Consequently, the return expectations from equity markets need to be revised downwards from 15% to 12-13%.
For the first time, in 2018, a majority of active fund managers in India struggled to beat their benchmark – do you think this heralds a new era where most active Indian fund managers like their US peers will fail to deliver alpha.
It’s too early to say that, I feel active fund managers may be able to generate alpha by the second half of 2019. The rally in the last 18 months was quite narrow, driven by 7-10 large cap stocks. Going forward, fund managers will see more broad based opportunities in the mid and small cap space, through which they may be able to generate excess returns over benchmark.
Which sectors are you bullish on?
As I mentioned earlier, I am bullish about the consumption theme particularly in household consumption. Retail consumption tends to be sticky; moreover, manufacturers have more pricing power. This makes them more stable and less cyclical. Sector-wise, I am bullish on retail focussed banks and NBFCs with strong retail customer base. I am also bullish on mutual funds and insurance as investors are moving away from physical to financial assets. Finally, there are selective opportunities in consumer staples and discretionary where the ‘premiumisation’ theme is playing that is consumers are willing to pay higher price for superior product.
Which category of funds should advisors recommend to their clients?
Investors can look at consumption themed schemes, as the category tends to see more stable earnings and is less cyclical. Historically, these funds have acted as ‘saver of capital’ during market downturn. Apart from consumption themed funds, investors can look at multicap funds as currently, there are investment opportunities across market capitalisation and a multicap fund gives the fund manager flexibility to pick opportunities across the equity market landscape.
