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What is your medium-term market outlook on equity funds? Could you take us through the key factors that could shape the markets in the near future?
We are cautiously positive on the equity markets from a medium-to-long-term horizon, i.e., beyond 3-to-5 years. We look at equity markets from the lens of intrinsic value, as we believe that stock prices follow intrinsic values over longer periods of time. Based on our internal research, Nifty is currently trading at a moderate premium to fair value. Given the decent growth expected in this fair value, we find equity markets an attractive asset class at the moment.
In the near term, (1) Corporate India’s business outlook, (2) Government’s continued focus on capital expenditure and (3) Our economy’s stronger growth potential keeps us positive. We are, however, closely watching for any risk that can emanate from (1) Ongoing geo-political events in Europe and (2) Sharper-than-expected economic slowdown in the developed nations.
Many MFDs are not comfortable with the current market valuation and hence, not recommending lumpsum in equity funds. What is your view on this? Should they continue to do STP or should they consider big lumpsum?
We find current valuations to be moderately above fair levels. But given the volatile nature of markets, valuation levels tend to change abruptly. For instance, as on March 31, 2023, Nifty was trading very close to its fair value. Hence, timing the market from a valuation perspective becomes a daunting task. Instead, let us pay heed to Seneca’s wise words, “Time heals what reason cannot”.
The antidote to this volatility is to (1) Increase your time-horizon, preferably beyond 5 years, and (2) Participate in a staggered manner.
India is on its way to being a 5-trillion-dollar economy, which three sectors are likely to perform well during this journey?
Despite being the 5th largest, the Indian economy is likely to be the 17th fastest growing economy in the world. We foresee multiple sectors that will benefit from this growth opportunity.
Firstly, private consumption is expected to play a key role in driving this growth. With our nominal GDP likely to grow at 10 to 11% and our population growing at 1%, we can expect an average Indian’s per capita income to rise by 9 to 10% annually. This additional income will engender spending in consumer discretionary areas, like organized jewellery, branded apparel, quick service restaurants, consumer electronics, etc. Hence, we are bullish on the consumer discretionary sector.
Secondly, the government's vision to establish the nation as a manufacturing hub has been affirmed by key policy actions: (1) Implementation of tax rate cuts, (2) Production Linked Incentives (PLIs) schemes and (3) Focus on capital expenditure in budgets. We are confident that India will play an increasingly prominent role in the global supply chain. Hence, industrial consumables, industrial products and capital goods will see good business momentum over the next 5 years.
Lastly, this growth will require support from our robust financial system. With stronger balance sheets and adequate capitalization at hand, we believe that the leading banking as well, as non-banking financial institutions are well-positioned to fund India’s economic growth and profit from it too.
Which fund categories should MFDs recommend their clients and why?
Given the current valuation levels and the strong growth outlook in the Indian equities, as a fund house, we are neutral across large, mid and small cap segments in our diversified funds. Hence, we encourage distributors to recommend categories based on their client’s risk appetite.
