UTI AMC bets on new pvt banks; shuns energy, PSBs

Q: Gold experts have cut back price forecasts this year after a sluggish first half. Do you expect correction in gold prices? Is this the right time to invest in gold ETFs?

A: Gold experts usually refer to global demand and supply trends and thus referring to gold prices in USD. In India most of the gold price appreciation usually comes from the relative debasement of our currency. Thus of the 30% YoY INR appreciation in the rupee, a large part of it can be seen in the fall in the INR/USD.

This is the reason that gold, many a time takes up the largest value-share in the trousseau of an Indian bride; it is wealth which is expected to hold on to its real value through most of her married life.

We do not expect a major correction in rupee gold prices. A combination of equity and gold is advisable for long term wealth creation, either directly or through equity-gold hybrid mutual funds, which are useful absolute returns products in an uncertain world.

Q: UTI Lifestyle fund is betting on consumer goods many experts believe that it is now overvalued? Do you think the same?

A: In times of volatility it is stocks with solid fundamentals which will form the core. Given that these stocks are in demand they will not be available at inexpensive levels relative to history.  Also, after the sharp bounce-back of 2009, the broad markets have gone nowhere, while the price performances in some consumer names have reflected the flight to quality in uncertain times.

"How much more to go?", is as tough a question to answer today as it was a year ago. As long as uncertainty prevails we will continue to like some of these names. Having said that, from a tactical standpoint, stock-specific developments such as downgrading or a bad monsoon, could see us hedging positions in select names.    

Q: The fund is also betting on the financial services sector. What are headwinds that the sector is facing now? Which sector are you avoiding?

A: We like new private sector banks. The major pain points are likely to be in the public sector banks (PSB). They are likely to have run up NPAs in the infra space and in their SME businesses, but they have not fully provided for the same. In other words, their reported book values may have to be adjusted downwards. 

With a potential farm loan waiver on the back of poor monsoons and the run-up to state and general elections round the corner, we would continue to avoid most of the PSBs. We are also avoiding the energy sector, given the policy issues in this area.

Q: What would be your advice to equity investors now? 

A: Return and risk are directly correlated. The risk in equities is mainly liquidity risk.  Unlike in debt instruments, in equities, you cannot know precisely, the price of a stock at a particular point of time in the future. In other words, time horizons in equity have to be very long for the true power of compounding to work.

Equity is the closest that most investors will come to taking entrepreneurial risk. We all know that entrepreneurial risk when judiciously taken is rewarded with breakout returns. If your time and analytical resources are limited, invest in 'process-oriented' mutual funds through SIPs and be patient. Remember, for every neighbour whose uncle picked the 'get-rich-quick' stocks there are hundreds who burned a hole in their pockets, or worse.