Currently, the equity market is quite volatile and in a negative range due to the rising number of covid-19 cases and concerns over economic recovery. In such a scenario, can we expect another big correction happening?
Thanks to the central banks and governments across the world, we had one of the sharpest recoveries in economic activity as well as markets – in context of the pandemic induced slowdown. In that backdrop and market performance, the second wave, especially the extent of sharp rise in cases, was not factored in the market valuations and hence we are seeing a risk-off in the Indian markets specifically. The rise in the US treasury yields and the dollar index did not help either.
On the issue of whether are we headed for another big correction, we do see this volatility continuing but believe that the policymakers are putting their best foot forward to bring things back to normal. Unless the health scenario worsens very steeply from hereon, the signals from other economies across the globe do suggest that once vaccinations ramp up to a certain level, the case counts do start to plateau first and then decline. We do hope and believe India is likely to follow that path and once the health situation normalizes, we can see economic recovery resuming. With the government also using this phase to transparently focus on building the right longer term blocks in capital investments, PLI schemes towards newer technologies, products etc., the longer term prospects for the economy and corporate earnings do look promising and we remain positive.
What is your near-term and medium term outlook on equity markets? What are the major triggers for the market currently?
Any near term projections are fraught with risk and hence we normally do not hazard a guess for shorter timeframes. In the long run, we have seen that markets largely mirror the earnings growth and looking at that aspect now, we do see Bloomberg consensus estimates factoring a 20+% earnings CAGR for FY21-23E. We do note that these numbers are yet to factor the impact of the second wave of coronavirus and the valuations are also slightly above long term averages (by around 5-10% depending on the framework). But after factoring these aspects too, we see a case for double digit returns in the next 3 years or so.
How do you see valuations across market capitalization?
Valuations need to be seen in light of the earnings and cashflows that the businesses are delivering. At our end, we use our time tested BMV (Business, Management and Valuation) investment philosophy to screen for businesses and we see that there are companies across market capitalisation that filter through. In that sense, we tend to be more bottom up and we do find reasonable amount of opportunities in every segment of market capitalization. At a headline level though, we still find large caps, followed by small caps offering the better risk reward. Mid cap companies valuations are lot more punchy on a relative basis.
BNP Paribas MF is launching a FoF that invests in global water value chains. What is the rationale for this launch? Why do you think exposure to global water value chains make sense for investors?
Water is a very basic necessity. With growing urbanization across several developing countries, we are starting to see pressure on availability mainly centered around large urban agglomerations. The trunk infrastructure across most parts of the globe is also very old and has not kept pace with economic development. This has led to large under investment and hence inefficiencies which have led to water availability shortages. With the pandemic giving us a big wake-up call on the health front, we do see a case of governments across geographies starting to focus a lot more on investing into infrastructure and particularly basic infrastructure like water. Estimates by institutions like World Bank do point to a large USD 6.7 trillion investment into water infrastructure by 2030 (and USD 22.6 trillion by 2050). In this backdrop, it is but natural that this segment of infrastructure creation does present a promising avenue to invest and benefit from.
What would be the underlying fund and how has it performed across cycles?
BNP Paribas Funds Aqua (LUX) i.e. the underlying fund, aims to invest in attractive global companies that are part of the growing global water value chain. The underlying fund has diversified exposure across consumer and industrial end markets in developed and emerging markets. The investment opportunities in water are surprisingly diverse and opportunities throughout the economic cycle, encompassing both defensive and cyclical businesses. Since its inception in Dec 2008 the underlying fund has seen various market cycles and has outperformed benchmark.
Considering Indian investors are not very familiar with the water value chain industry, how can MFDs spread awareness about this new concept among their clients?
BNP Paribas Funds Aqua Fund of Fund, an open-ended Fund of Fund scheme is a thematic and specialized fund. There is an opportunity and need to improve water infrastructure given rising global population and urbanization. When thematic funds are focused at a country or regional level, the avenues to invest do tend to become restrictive. In that sense, it is important to have the mandate to invest across the globe. We believe this is an interesting avenue for mutual fund distributors to evaluate and recommend to the relevant target segment of investors.
Which scheme should MFDs offer to their clients?
Investing is very personal and to that extent like other professionals, (be it a doctor, or lawyer etc.) the mutual fund distribution community also understands that no two investors’ goals, risk appetite, horizon to invest are the same. They understand their clients’ financial needs well and based on that they can recommend a suitable product.
