In an interview with Himadri Buch of Moneycontrol, Vinay Kulkarni - Senior Fund Manager - Equities, HDFC Asset Management Co Ltd talks about the risks to market rally
HDFC Mutual Fund believes geopolitical tensions, particularly emanating from the Far East and elsewhere in the world, continue to remain key risks to this market rally.
In an interview with Himadri Buch of Moneycontrol, Vinay R. Kulkarni - Senior Fund Manager - Equities at HDFC Asset Management Co Ltd talked about their strategy in scheme and sectors they are bullish on. Edited excerpts:
The rally on D-Street is powered by liquidity and this time it is from domestic investors and stable global markets. But, fundamentals tell a different story. Macro data remain mixed while earnings have not picked up. Is that a concern for markets going forward?
GDP growth has indeed slowed down in last few quarters. However, this is, in all probability driven by demonetisation and GST, two very significant reforms that have caused temporary disruption in the normal functioning of the economy. However, as things normalise, growth rates are likely to recover over the next few quarters. Monthly data for July, August and September for several parameters already point in that direction.
The medium term outlook for the economy is even more encouraging. This view is driven by a likely acceleration in infra capex, affordable housing and a revival in private capex. As per recent news flow, there are reasons to be optimistic about revival of private capex in the not too distant future primarily led by metals sector.
Earnings outlook is improving and an earnings recovery is imminent on account of improvement in operating margins, lower interest rates, peaking NPA’s and higher metal prices. We believe this market continues to remain an attractive investment opportunity for long term investors.
What can derail this rally on D-Street? Geopolitical tensions, earnings failing to catch up, crack down on shell companies, or drying up of liquidity?
The current rally is largely driven by the appeal of Indian equities to both domestic and international investors. While FII's (foreign institutional investors) continue to remain positive on India, they have taken some money off the table on concerns over the performance of the economy. However, the strength of domestic flows has been evident in market buoyancy over the last few months despite FII selling in the equity markets.
Key risks to this market rally remain external geo-political tensions emanating specifically from the Far East and elsewhere in the world. On the domestic front denting market sentiment could reduce liquidity from domestic investors.
Which are the other sectors that you are betting on at this point and time? Why?
The fund is overweight on financials, utilities, industrials and energy sectors. The economy we believe has entered a new cycle which will be driven by capex and discretionary consumer spending. We believe that the government, RBI and the banks have been proactively working on resolving the NPA issues plaguing the banking system. Therefore, in our opinion, the NPA cycle has peaked which will enable banks to recover a portion of their distressed assets. Further, in light of the recent recapitalization announcement by the finance ministry, the Indian banking sector especially public sector banks are expected to benefit significantly.
Strong affirmative action by the centre and the states on public infrastructure (roads, railways and other critical infrastructure) has improved order visibility and will likely lead to better order execution for infrastructure companies.
Which sectors are you avoiding or underweight on?
The fund is currently underweight on IT, healthcare services and the FMCG space. These sectors we believe are mature segments of the economy and are fairly priced in the current market. However we continue to invest selectively in these sectors in pockets where the risk reward is favourable.
What are the cash levels in your funds? Are you sitting on huge cash pile up expecting a correction in the market?
The fund has a dynamic allocation between hedged and equity. The debt component remains largely stable in order to provide regular income. The unhedged equity varies between 15-40 percent depending on the fund managers` view on the market. The fund does not take active cash calls and maintains a small cash balance for liquidity purposes. Currently the unhedged equity exposure is~23 percent
Mistakes you want investors to avoid making especially at a time when markets are trading at record highs?
A hallmark of long term investors is their understanding of the need for financial planning and assessing risk. Asset allocation and goal based planning of finances are imperative to long term sustainable wealth creation and wealth management. As the saying goes, failing to plan is planning to fail. Investors should stick to their investment plan and not get swayed by short term market trends.
What is the investment strategy are you following in this kind of a market and why?
The equity portion of HDFC Equity Savings Fund follows a multi-cap strategy. Currently, fund has invested in predominantly large caps with growth attributes. There is no style or market capitalization bias when it comes to managing the equity component of the fund. The Fund endeavours to invest in a large number of sectors, which are not highly correlated, the objective being to maintain reasonable diversification. Hence, the style could be described as ‘growth at reasonable price.’
The fixed income portion is invested in corporate bonds, bank perpetual bonds and GILTS. Currently, Banks perpetual bonds – 100 percent exposure is to Public Sector Banks as we believe that these instruments offer good value in the relative market context. The maturity profile of the debt portion is determined by our view on the interest rate scenario, prevalent in the market.
What is your take on banks, pharma and FMCG sectors?
We believe that banks should be looked at as two sectors, retail and corporate banks. Retail banks have seen sustained growth and are fairly priced in the current market setup. Corporate banks which have largely been bogged down by NPA`s and have stressed balance sheets is where we find significant opportunities in the medium to long term. We believe that the NPA cycle has peaked and surprises in new NPA`s looks unlikely. The large bank recapitalization plan announced by the government will greatly benefit the PSU banks and bring them back to a level playing field in terms of new business.
Pharmaceuticals and FMCG, in our opinion, have entered into a phase of low growth and earnings in the pharma space especially have been disappointing this year.
What are your expectations from corporate earnings?
The earnings disappointment in recent past has been weak mainly due to the sharp fall in profits of sectors like steel, engineering & capex and corporate banks which is likely to remedy itself in the coming quarters.
With the sharp recovery in steel and other metal prices, peaking provisioning costs in banks and with a slow but steady improvement in infra capex, earnings recovery is underway and it should become increasingly evident with each passing quarter.
Tell us about your HDFC Equity Savings Fund. Where does it invest? This scheme is suitable for which kind of investors?
HDFC Equity Savings fund is a multi-asset allocation fund that seeks to invest in equity / equity related instruments, arbitrage opportunities, and debt & money market instruments.
The un-hedged equity exposure of the fund is capped at 40 percent ensuring lower volatility while the combined exposure of Equity + Arbitrage offers the tax efficiency of equity oriented funds. The equity allocation is dynamically managed based on the overall fund house view of the current market situation. The fund is an ideal investment solution for those investors who have a limited risk appetite but would like to increase their exposure to equities from an asset allocation standpoint.
The equity portfolio is managed conservatively with investments spread across at least 5 to 6 non correlated sectors; while the fund can invest across the market cap spectrum, it is currently invested predominantly in large caps (85 percent of the unhedged equity portfolio).
Who is this fund suited for?
Multi-asset class investments increase the diversification of the overall portfolio by distributing investments throughout several classes. This reduces risk (volatility) compared to holding one class of assets. Hence, the robust structure of the product itself ensures that the fund performs well across market cycles.
We believe that this fund is an ideal investment solution for investors with limited risk appetite. The name itself epitomises a savings fund. The attributes of this fund give investors the benefit of higher potential returns (as compared to traditional savings instruments) while reducing the volatility risk associated with equities all this while ensuring tax efficiency.Thus the equity savings fund category has seen steady flows due to the low rates offered by traditional.