Dhimant Shah, Senior Fund Manager - Equity, Principal PNB Mutual Fund shares his perspective on markets and the current state of the economy with Cafemutual.
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Is the current euphoria in the market justified? What are the key risks in the market currently?
I don’t think it’s sheer euphoria. It can be a sustainable opportunity. The stable government which came to power after a few decades has improved the sentiments in the market. Also, easing inflation and rise in corporate earnings has provided a much needed fillip to the market. Meanwhile, the goods and services tax (GST) which is likely to be implemented soon can be a game changer and conducive for the growth of companies.
However, a few internal and external concerns need to be addressed. On the internal front, we have to look forward to the ability of the government to implement reforms smoothly. Externally, we have to watch out for the geopolitical threat which could have impact on global oil prices. Oil is a big concern for India.
Have your shuffled your portfolios after the formation of new government? Which sectors do you think will play out well in the next three years? Which sectors are you bullish/bearish on at this point? Which sectors are you avoiding currently?
Yes, we have reviewed our portfolio. In the next three years, I believe financial and cyclical sectors will play a major role in driving the markets.
In any economy the financial sector tends to perform well when the economy picks up. Apart from this, we have taken strong position in cyclical sectors like commodities, cement, mining etc. We are not bearish on any sector; however, we have reduced our holdings in defensive sectors like IT and Pharma.
Fund managers are increasing bet on infrastructure sector. What is your view on this sector?
If you look at the balance sheets of infrastructure firms, you will find that many companies are still struggling with debt obligation due to global economic crisis. However, a few companies have shown higher than the expected earnings potential. This sector will perform better in the coming months. In fact, we have found some companies having good management and healthy growth & earning potential.
What is your reading of the current state of Indian economy?
Clearly, there would be an upward trajectory from here. In order to achieve a sustainable growth, the government should take corrective steps.
The government is keen on developing agriculture and industrial sectors. This will have a positive impact on exports. Hence, I feel that the Indian economy can easily sustain a growth of 7-8% in future.
Frankly speaking, our economy is largely dependent on external flows. The implementation of General Anti-Avoidance Rules (GAAR) and GST will be a good step forward to attract foreign investments.
What global cues are you looking out for?
Reduction in geopolitical tension, the World Trade Organization (WTO) pact and providing a conducive environment to facilitate trade and commerce will create a major difference in the Indian economy. On the commodity front, reduction in oil prices will help the government to reduce its subsidy bill.
Another development in the global front which one should look forward to is the interest rate hike in US. Since the job market in US has improved, it has provided US Federal Reserve headroom to increase interest rate by a few basis points. However, I don’t see any meaningful threat for our country in case of capital outflows.
Post the elections and the recent market rally, retail investors’ interest in equity funds seems to have revived. Do you think the momentum will continue going ahead? What could derail it?
Investors who burnt their fingers six years ago may not like to come again. Also, investors who bought equity through ULIPs have lost confidence in equity as an asset class. Still, the industry is facing a challenge to regain investor confidence. Retail participation in equity has dropped to 3% now.
However, equity as an asset class is the only product which help them grow their wealth in the long term. I believe retail investors will come back to equity once the market gains momentum. In fact, retail investors have started coming in equity funds.
Potential sources of derailment, as I mentioned earlier, are geopolitical tension and non-governance issues.
Most of your funds having history of more than a decade like Principal Personal Tax Saver Fund and Principal Growth Fund have underperformed their respective benchmark particularly in 10 years. However, another old fund Principal Tax Saver Fund has managed to outperform its benchmark by a small margin in 10 year period. Why these funds have not lived up to the expectations? What are the key reasons? How much time will it take to deliver performance? (Based on value research data as on June 30, 2014).
In the long term, these funds passed through many business cycles. Now, there is a new team to manage these funds. In fact, in the last three years, we have consistently outperformed our benchmarks.
There are factors to judge the performance of a fund – capital protection, adherence to scheme’s objective and flexibility to rejig the portfolio. By and large, if a fund sticks to this process, the outcome would be favorable.
Your asset allocation fund - Principal Smart Equity Fund is among the top performers in the category? What has helped this fund? What strategy do you follow for asset allocation? How it is different from other asset allocation funds?
We stick to a structured process and methodology while picking stocks which has paid off well. Principal Smart Equity is an automatic allocation fund. It uses month end PE ratio of Nifty to decide on equity exposure. It has delivered an absolute return of 44% in one year against 24% by the category. We have a team which reviews the portfolio on a regular basis. We follow both internal research and automatic formula for asset allocation.
What are the next triggers for the market?
Interest rate and implementation of reforms are the major triggers for the market in the coming months.
