Markets have been rallying like never before. In such a scenario, MFDs have been finding it difficult in dealing with incremental inflows. What is your advice to them - should they continue to recommend equity funds or it is better to invest in fixed income funds?
I believe equity to be the asset class for investing for the next 10 years. Nifty’s profit growth has started increasing substantially in the last 5 quarters and it is a noteworthy change compared to the past 12 years.
Last decade there was a significant deceleration in the earnings growth due to the non-participation of domestic cyclical sectors like banks, engineering capital goods, utilities and infrastructure-related companies, which were going through a down cycle. Given that the phase is over, it will have a significant upward momentum and that is where Nifty’s profit growth will be seen increasing. The structure of the market is such that, in the next five to ten years, when the earnings growth picks up, markets should generate reasonably good returns.
Should investors expect correction in the equity markets?
The equity market in the near term is like a voting machine and in the long term, like a weighing machine. After a one way move in the last one and half years, a decent correction could be expected at any time. Empirical data suggests bull market corrections are generally brutal. For instance, in May 2006 Nifty corrected by 29% in a month.
Such corrections are possible in a bull market but that will be an opportunity to invest at that juncture. The Indian economy is picking up and is on the verge of a significant up move. Further, earnings growth acceleration is visible in the improvement of profits of domestic cyclical sectors like real estate, capital goods, engineering, utilities, corporate banks and some of the large companies in refineries & telecom space.
Whenever the correction happens, it can be brutal as there is a lot of froth built up in many stocks related to digital, technology and some consumer-centric businesses. The best way to approach the market is to avoid these expensive sectors and move to cheaper sectors within the domestic cyclical space as well as pharma formulations.
Despite the pandemic, pharma funds after initial run up have ended up with not so good returns. In fact, returns of pharma funds are much less than large cap and mid cap funds. Why do you think MFDs should recommend pharma funds to their clients now?
Pharma is a stable and defensive sector, where most of the companies are currently trading at record low margins and are available at reasonable valuations.
The sector witnessed a significant downturn in the last five years, because of FDA (Food and Drug Administration) observations & warning letters and the inclusion of various drugs in the National List of Essential Medicines under the Drug Price Control Order. Entering the sector at a time when the business cycle has already bottomed out makes it attractive and reasonably good risk-adjusted returns can be generated over the next five years.
Secondly, pharma has also displayed huge business capabilities in the US as well as emerging markets and India. Further, many good quality companies are cash rich businesses that are resilient, as they do not fall under discretionary spending.
We clearly see a turnaround happening in the pharma sector, where domestic growth can be to the tune of 11% to 13%, which is materially higher than the previous five-year average.
What was the rationale for launching ITI Pharma and Healthcare Fund?
The massive rally in the past one & half years and the froth in certain sectors, requires more caution while investing in equity. Further, not focusing on risk and valuation is where a material meltdown in various stocks and sectors happens.
At a juncture where people are struggling to find value, there is an opportunity to look at ITI Pharma and Healthcare Fund which will focus on the formulation segment given its attractive valuation, record low margins and anticipated up cycle. It is an interesting time to launch the fund when the sector in our view is at the bottom of the last five years of down cycle, as this is where opportunities come in.
Why are you bullish on the pharma and healthcare sector? How do you perceive their growth in the post-pandemic era?
There is an increased awareness amongst people to take care and spend on their health. Further, companies are also improving their supply chain to ensure the availability of medicines across the country. Certain government measures like increase in the number of pharmacies, centres, etc. will be beneficial for the sector to penetrate further.
People are more concerned now and are more cautious about their health. Increased awareness will help the sector to grow further. Also, the average age of Indians today is below 29 years and as the population ages, there will be a material change in the health care needs.
What makes ITI Pharma and Healthcare Fund different from other such funds?
Stocks of India-centric MNC pharma companies, health care services as well as hospitals, some of the API (Active Pharmaceutical Ingredient) players and diagnostics have rallied massively due to the pandemic. ITI Pharma and Healthcare Fund will focus majorly on the formulation segment where the valuation looks extremely attractive at this time.
How do you plan to mitigate risk in the fund?
Within the pharma space, there are hospitals, API (Active Pharmaceutical Ingredient) players, healthcare services & businesses, diagnosis companies, formulation companies, etc. Further, within the same segment itself, companies have diverse business models and tap different markets like India, the US, Europe, Latin America, emerging markets, etc. While some of these companies may focus on pain management, others may focus on domestic chronic therapy, so on and so forth.
Diversification within the sector itself is a big beneficiary for mitigating any concentration risk in the sector.
