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What is your medium-term outlook for the equity market? How comfortable are you with the valuation across market capitalization?
September 2023 was a volatile month for the Indian equity market. However, the outperformance of mid and small caps over large caps continued during the month.
Corporate earnings in FY 2023-24 are likely to be broad-based driven by domestic sectors such as banks, industrials and automobiles. So far, consensus corporate earnings estimates have been largely stable for FY 2023-24 and FY 2024-25, in the range of mid to high teen growth for Nifty 50 companies.
While earnings have been holding up well, valuations have also moved up. Indian markets have come back to all-time highs. Nifty is now trading somewhat above long-term average valuations on a P/E and P/BV basis (one year forward). Similarly, India continues to trade at a premium to emerging markets and the premium is now slightly above long-term averages. Midcap and small cap valuations are above their long-term averages. On a relative basis to large caps, mid and small cap valuations are at significantly higher levels as compared to long term averages.
Hence, with the sharp up-move in the market, one must be prepared for some volatility in the near term even as the long-term argument for Indian equities and India’s growth story remains unchanged. We remain positive on sectors such as industrials, manufacturing, infrastructure, consumption and cement. Also, auto and auto ancillaries, BFSI, and home building are some other sectors which we are positive about.
You have launched Kotak Consumption Fund. Why are you so optimistic about consumption theme and what are the opportunities in this theme?
India's 5-year average consumption growth rate is the highest among its global counterparts at 10.6%. With a growing population and an emerging middle class, the demand for consumer goods and services is on the rise. The rise in per capita income from the current USD 2,000 to USD 4,000 and beyond shall also fuel a sharp uptick in discretionary consumption.
The consumption sector tends to be less volatile than other sectors, making it relatively resilient during economic downturns. The return ratio is also better than most other sector indices. Moreover, 6 of 11 times in past years, Nifty India Consumption Index TRI has beaten the Nifty 50 TRI and the Nifty 500 TRI indices
Kotak Consumption Fund aims to invest in companies that are likely beneficiaries of our nation’s consumption habits. The more the country spends, the bigger these companies become.
What are the key risks for consumption theme?
Risks for consumption theme can be linked to high volatility in raw material prices. Also, if a sharp slowdown happens in the economy, it poses a risk as well.
People say that consumption theme will benefit with increase in per capita income. However, there is no evidence which proves this theory. What is your belief?
India is a developing country that has recently crossed the all-important threshold of USD 2,000 per capita income. And, as seen in various other economies, discretionary spending tends to see a sharp jump once the per capita income crosses the USD 2,000 level.
As India’s per capita income reaches an estimated USD 13,000 by 2040, the wallet share of discretionary spending is likely to see a multi-fold increase.
Many experts believe that passives are best way to take thematic or sectoral exposure as it reduces cost and eliminates the risk of underperformance. Your comments...
At Kotak MF, we have delivered an outperformance in most of our funds across long periods. We are confident that we shall be able to add value to the investors through Kotak Consumption Fund too. Our strong in-house research capabilities, strong fund management team and disciplined investment process of sticking to fundamentally sound companies shall ensure that we continue to deliver alpha in our funds.
