Ashish Ranawade, Chief Investment Officer, Union KBC Asset Management talks about the current state of the economy and shares the secret behind the recent success of Union KBC Trigger Fund.
The Sensex has crossed 27k level while CNX Nifty 50 crossed 8k. Is the current euphoria in the market justified? Can the market sustain these levels? What are the key risks in the market currently?
This is a secular bull run. Though the market looks a bit expensive, the valuations are still trailing. Both global and domestic investors have high expectations from the new government.
Corporate earnings are improving and the risk taking ability of foreign investors is also increasing. And we all know that adequate liquidity and strong fundamentals drive the market. I believe that the market will reach a new level in the next few years.
The only major risk is poor monsoon. Deficient monsoon can affect agricultural sector. It could deter growth to some extent. Also, geopolitical risk could be a dampener. However, the plus point is that the new government is strong enough to address these risks.
Since both equity and debt market are driven by FIIs inflows what would be the impact if FIIs pull back their investments?
Firstly, we have to look at why FIIs would pull back money. According to me, there are only two circumstances – poor performance of India compared to other developing economies and risk aversion. Since the economy has bottomed out and the macro-economic data suggests strong recovery, both these events are unlikely to happen.
Also, if FIls pull back their investment, only liquidity will dry up. The fundamentals will remain strong and eventually it will bring back liquidity in the market. There are more positive triggers in the market than negatives.
Considering the strong sentiment in the market what will happen in case of minor correction or downfall? What strategies have you put in place to overcome such risks?
I would say any minor correction gives an opportunity to fund managers as well as investors to increase their exposure or make an entry in the market. Investors can rebalance their portfolio in such a situation by increasing allocation to equity funds.
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 avoiding currently?
Yes, we have significantly reshuffled our portfolio. Post-election we have gone overweight on capital goods and infrastructure sector. Also, we have increased our exposure to mid and small cap stocks. We believe that mid and small cap stocks are still undervalued and are available at a bargain price. Besides, we have reasonable exposure to financials, pharmaceuticals and IT.
On the other hand, we have cut down exposure to automobile, cement and oil & gas marketing companies because the valuations of these companies are fairly high at the moment.
Fund managers are taking a bigger bet on infrastructure sector. What is your view on this sector?
Government has clearly articulated its willingness to improve infrastructure in India. Clearly, if India wants to grow there should be better infrastructure facilities. Hence, we are very bullish on this sector.
The Supreme Court has recently termed all coal mines allotted between 1993 and 2010 as illegal. Though the final verdict is yet to come what would be the impact on the market? Which sectors might get affected?
Clearly, the companies who have captive coal mines will be affected. Power, steel and aluminum producing companies will get hurt badly. Though the verdict can impact other sectors as any negative outcome may cause a hike in coal price, I believe it will not have implications for the broader market.
Has your fund invested in power, coal and mining stocks? If yes, to what extent and what would be the impact on the performance in case of negative outcome?
It would be unfair to say that our portfolio will not be affected but we are relatively less exposed to such stocks.
What is your reading about the current state of the Indian economy? What global cues are you looking out for?
Clearly, the economy has bottomed out. Currently, our economy is in a consolidation phase. The actual growth will pick up in the next two years. There are too many positive triggers. We are optimistic that the FY 15 will be the year of consolidation. And, FY16 and FY17 would be much stronger.
On global front, one should look at two global events – US interest rate and fiscal consolidation in Eurozone. These events can dry up liquidity as risk taking ability may reduce. However, from there onwards, the fundamentals will drive the economy. And we are confident that currently India is in a position to sail through these events easily.
By achieving its predetermined target of 30% Union KBC’s Trigger Fund has returned money to investors within 8 months. What helped this fund? What strategy did you follow for asset allocation? How much role did the bull run play in achieving this target?
We have outperformed the benchmark by 5%. While, the respective benchmark of the Trigger Fund has delivered 25% in eight months the fund has delivered 30% return. We picked quality stocks from BSE 200 universe by following a blend of top down and bottom up approach. The fund had a large exposure to cyclical, private banks and pharmaceuticals.
The bull run has certainly helped us in achieving this target. Also, timing has played a major role.
How important is remaining true to scheme’s label for a fund manager? What if the market gives a good opportunity which is beyond the mandate of the scheme? Do you think fund managers should deviate from scheme’s mandate to achieve better performance?
In the fund management business, we collect money by disclosing key facts like scheme’s objective and how it is going to work. It’s certainly not fair to deviate from what you have promised to investors. We have a big responsibility of managing people’s hard earned money. Hence, remaining true to scheme’s label is the key to fund management.
