The markets have been on fire since Budget 2021. What would be the impact of Budget 2021 on the equity markets in the medium term?
The Union Budget 2021 is a growth oriented expansionary budget that focuses on the key areas to provide support for sustained long term growth. The change in govt. narrative from socialist mindset towards growth shows the intent on doing the heavy lifting to support the economy.
The government and the RBI have been providing fiscal and monetary support, respectively, to support the ongoing economic recovery.
The public spending typically has a multiplier effect on the economy and the front loading of government spending may also potentially boost employment in the short to medium term. Implementation and execution are the key to realizing the benefits of all these measures in the longer term for the Indian economy.
Sensex is at its record high and has crossed 50,000 points on February 03, 2021. Given the current situation, how comfortable are you with the valuation?
Valuations have surged in recent months due to the sharp pullback from the lows of March 2020 and the subsequent rally but we believe investment opportunities continue to be available in individual companies. From a near term perspective, valuations may seem stretched given the economic impact of the pandemic in FY21, however, we believe there continue to be pockets of opportunities across market caps from a 3 to 5 year investment perspective, as growth improves and margin expansion levers kick in, which continue to make select stocks attractive. However, in the near term, volatility can be expected given the sharp run up in recent months.
How do you see valuations across market capitalization?
We believe there are companies across market capitalizations and sectors, which are available at attractive valuations despite the market run up of recent months. Additionally, there are many companies, especially in the mid and small size segment that have improved their cost efficiencies, lowered their debt and have built a robust business model overtime. As the volumes start picking up in the markets, these companies may be better positioned for margin expansion compared to historical trends. Stock selection would be the key factor in picking up the right stocks.
Principal Tax Savings Fund has consistently outperformed its benchmark over the 5 and 7 year periods. What are the three things that contributed to this growth?
The Principal Tax Savings Fund has a robust investment process based on our 6 pillar investment framework backed by a strong inhouse investment management and research capabilities. We believe that a consistent and process based investment approach has been the key to the historic performance of the fund.
However, the short term performance indicates that the fund has marginally underperformed. How will you ensure that the fund regains its growth momentum?
Equity markets are supposed to be volatile and appears to be in constant commotion in near term. It is at times futile to keep judging funds or markets, in general, from myopic lens. Investment is a humdrum activity, contrary to the excitement, which is created by the media. We believe that consistent and robust investment process is the key to success in the long run. We continue to follow our bottom up stock selection approach and focus on the fundamentals of the individual companies in the portfolio. We expect this investment approach to deliver benchmark beating performance in the long run.
The fund has allocated 37% of the assets in the financial sector. Why are you bullish on this sector?
Financial sector is the lead indicator of economy growth. We believe that the growth in the sector will precede the overall economy growth. The Financial Services (including Banks) had the largest allocation in the fund portfolio. Within this sector, the portfolio is tilted more towards larger private sector banks, insurance and select high quality NBFCs. From near term perspective, the concerns on deterioration credit quality has subsided to a large extent.Overall, we believe banks/ NBFC with strong liability franchise would continue to gain incremental share and may reflect steady NII growth aided by margin expansion.
The fund has marginal exposure to small cap funds. What is the key reason for this?
The small cap segment of the equity markets is typically the least liquid and most volatile part of the market. Prices may move sharply on very low volumes. Hence, to maintain a prudent diversification in the portfolio along with an appropriate risk management perspective we usually maintain marginal small cap names in our portfolio. Moreover, the small cap companies in our portfolio are primarily the well-researched names with considerable track record and healthy financials. We avoid small cap companies where we see unfavorable valuations, tempered financials, and deteriorations in business fundamentals in foreseeable future. We also avoid investing in companies where we are not confident of the quality of the management team.
How is Principal Tax Savings Fund different from other tax savings in the market?
Principal Tax Savings fund follows a bottom up stock selection investment philosophy. Typically, we look for investment opportunities in quality stocks with growth opportunities and available at an attractive valuation.
Why should distributors recommend Principal Tax Savings Fund?
Principal Tax Savings portfolio is well diversified across sectors. The companies under this portfolio are high quality businesses with proven track record over a long period of time and strong balance sheets. The fund provides a wealth creation opportunity to the investors other than tax saving advantage. Advisors should recommend this fund based on their assessment of the risk appetite and the financial goals of the investor.
