What is your outlook for equity market for 2016?
The year 2016 will be a slightly better year for equity markets.
To begin with, inflation has come down significantly. In fact, after two consecutive years of bad monsoons, food inflation is still under control. This would provide some headroom to RBI to cut rates. Secondly, falling commodity prices has helped the Indian economy reduce its current account deficit (CAD) and fiscal deficit. We expect commodity prices to continue to fall. Also, unlike other BRICS nation (excluding China), India is not dependent on commodities for growth.
Meanwhile, the capital expenditure of private sector will continue to remain muted in 2016. However, the government expenditure is likely to help support the growth in 2016. We have already seen a significant jump in capex in infrastructure and defense.
Moreover, implementation of Seventh Pay Commission and prospects of good monsoon will increase consumption in sectors like automobile, private banks, affordable housing and infrastructure. It may add 0.6% growth to GDP.
Further, we believe that the corporate earnings growth has bottomed out and likely to peak in the days to come.
However, investors should not expect higher returns from equity markets. We believe that the market has the potential to deliver a return of 10-15% in 2016.
What are the key risks to market currently?
Rural economy has faced two bad monsoons and on top of that there was only a marginal increase in minimum support price (MSP). Another bad monsoon will hurt rural consumption which is already under stress. Also, the geopolitical tension poses a risk for commodity prices. However, we don’t see foresee any of these risks in the near future.
Can you take us through your fund management strategy? How it is different from others?
We follow a philosophy called BMV which stands for Business, Management and Valuation. We pick up stocks on the basis of parameters like quality, growth, longevity and price.
The first part i.e. business is about picking a good company. Firstly, we look into the nature of business to determine the quality of business. However, our main focus is to assess competitive advantage of a company. Our second filter is sustainability of growth over a long term.
Second part is management. While shortlisting a stock, we look at the aspirations of management. We look for certain attributes like size of opportunity, ability to take tough pricing decision and commitment for the business. Finally, we look for a reasonable price before buying any company.
What are your risk mitigation strategies?
We have a robust research team. The average experience of our team is 14 years. We don’t rely on external agencies to assess risk.
Secondly, we have put in place a robust mechanism to filter companies. We track 230 companies of which 50 companies have made it to our ‘buy’ list.
You are managing equity funds of BNP Paribas MF for four years. All these funds have consistently outperformed benchmarks by a wide margin over a three-year period. What has worked in your favour? How do you plan to sustain this performance?
We chase growth stocks. We tend to avoid companies with low PEG (price earning to growth). For instance, we will not buy a stock a stock with earnings growth of 5% and PE of 10x (which is considered reasonable). Instead, we will buy a company with 20xPE with earnings growth of 20% (Price earning to growth or PEG is 1x).
Can active fund managers continue to beat benchmarks in future? Will there be challenges in generating alpha and finding the right stocks to beat indices?
Over the past two decades, the Indian mutual fund industry has created significant alpha. There is still immense opportunity to generate alpha. However, I believe midcaps will have adequate room to beat the benchmarks compared to large cap peers. Mid-caps will benefit the most due to growth reforms initiated by the government.
Though 2015 was not a good year for equity market, the industry has witnessed healthy inflows in equity funds. Do you see this trend continuing?
The good thing is that savings have gradually started moving from physical assets to financial assets. Investors have now realized that real estate and gold don’t have the potential to beat equity markets in the long term. I believe money will continue to flow into financial assets due to the lackluster performance of gold and real estate.
What category of equity funds would you recommend investors to invest at this juncture?
Investors can invest in diversified funds having reasonable exposure to large and midcap stocks.
