Many think the market is running ahead of fundamentals and doubt the sustainability of this rally. Your comments.
Indian markets have bounced back significantly from the bottoms in tandem with the global markets. There are multiple reasons for such a sharp surge. Primarily, the anticipated risk of the COVID 19 has not panned out as was being feared and the rigorous effort by the scientific fraternity to come out with vaccine, in such a short period, was unexpected. Secondly, central banks and governments across the world came up with concentrated efforts to safeguard the economy from lockdown related disruptions. Thirdly, the decline in interest rates, globally, led to increase in value of most asset classes. Fourth, most of the corporates were able to rationalize their cost structure, to minimize the impact disruptions. Some of these cost reduction initiatives are permanent in nature and may lead to sustainable margin expansion. Fifth, a few of the corporates/banks/NBFCs were able to raise equity to strengthen their balance sheet. And lastly, adequate liquidity in the system led sustained FII inflow to have a positive impact on the markets.
Hence, it will be a little early to comment that markets are running ahead of its fundamentals. Going forward, markets may be driven by reforms measures taken by the government and sustenance of demand momentum, in the near term. Having said that, the pendulum of markets never remains at equilibrium and will move from one extreme to another from time to time. So, some corrections in markets can be never ruled out. In fact, they are healthy for the long term.
What is your near-term outlook on equity markets? What are the major triggers?
It is always difficult to predict the near term in the markets movements. From medium to longer term perspective, the growth potential of India is the key driver for equity markets. The positive risks outweigh the negative risks over medium to long term. In the near, sustenance of the demand momentum is the key, given the impact on jobs and micro, small and medium enterprises (MSME) sector. Fiscal deficit will be another factor to watch out.
Businesses with better fundamentals could out-perform over medium/long term. The recent policy thrust on Atmanirbhar Bharat, led by incentivization like production-linked incentive (PLI), and diversification of global supply chain away from China may aid growth of domestic manufacturing. Monsoons over the last two years have been favorable which has supported the rural consumption growth. We expect farm economy to do well in the coming year as well. However, revival of businesses associated with travel, tourism and outdoor entertainment may be a key challenge. Barring this, we expect service economy to continue the growth path. Overall, accommodative monetary policy and fiscal push towards growth could play a key role in the revival.
Given the rally in equity markets, how do you see the valuations in the large cap space?
Markets, in general, may appear to be on the premium side of the valuations in the historical context. However, as mentioned above, the decrease in interest rates has a positive impact on the value of equity as an asset class. Mutual fund investors are advised to not try to time the market based on such short-term market movements. Markets peak and troughs are visible only in hindsight. Within the large cap space, there are pockets which have become expensive but at the same time there are businesses which are trading below their intrinsic value. A bottom-up stock selection approach along with a robust and consistent portfolio construction process could help in long term wealth creation.
As on October 31, over 16% of the Principal Large Cap Fund was in cash and other assets. What is the reason for this?
We started investing in the second half of October, 2020 and have deployed funds quickly. The fund has more than 93% investments in equity as on November 30, 2020.
Which sectors/pockets currently appear overvalued to you? Which are more reasonably valued?
We believe that IT, Consumer and Retail are trading at higher end of their valuation range while certain Banks/NBFCs, Oil Marketing Companies (OMCs), Pharma, Auto, Telecom and Utilities are at reasonable valuations.
Many believe that generating alpha is difficult in large cap funds. Hence, it is better to go passive. Your comments.
We believe that active investment approach is better than passive. Generally, the well managed large cap funds have a tendency to outperform the benchmark. We believe a robust investment process and stock selection approach would generate outperformance to the benchmark in the long run. Investors should seek appropriate advice to invest in such funds rather than comparing the average returns of the industry.
You can take upto 15% exposure to US stocks in this fund. How will it help this fund's performance?
Up to 15% of the portfolio endeavors to invest in US large cap companies. Many of these companies are global leaders in their sectors, have shown lesser volatility and are dominant businesses and have moderate levels of debt. They also have a history of wealth creation for their investors. We find that combining Indian large caps and US large caps in a single portfolio over the long term diversifies both - the sources of volatility and returns. It also tends to reduce the volatility with the potential to add to the returns of the portfolio.The portion of the portfolio invested in US stocks is also invested in businesses and sectors that are typically unavailable in the Indian listed space - technology product companies, e- commerce companies, etc.
How is Principal Large Cap Fund different from other funds in this category?
Principal Large Cap Fund invests in a portfolio of Indian and US large cap companies. The fund has a robust investment process and a bottom up stock selection approach.
The fund is the first Indian large cap scheme that would be investing in US large cap companies. The fund seeks to invest up to 15% of the portfolio in US companies with a market cap higher than USD 50 Billion. Principal Large Cap Fund would be supported with the research and advice on US companies by the US based investment team of Principal Global Equities, an investment boutique of Principal Global Investors.
Why should distributors recommend this fund to their clients?
Large cap funds should typically be a core allocation of the investor’s portfolio. The Principal Large Cap Fund invests in Indian and US large cap companies – providing exposure to the leading companies in India and the United States. As mentioned earlier, this provides investors the dual benefit of potential lower volatility and more diversified returns. An analysis of historical data of Indian and US large cap indexes shows that a mix of US large cap companies with Indian large caps not only helps in gaining from the US economic growth but also reduces the volatility. Investors also benefit from potential rupee depreciation. We would advise investors to consult their financial advisors or distributors for further guidance on asset allocation and investment horizon.
