I think there are several bottom-up opportunities in the midcap space and perhaps it is even time now to think a bit differently on how much premium one is willing to pay for growth expectations and if that growth is as dependable as it is made out to be, Lalit Nambiar, Executive Vice President and Fund Manager – UTI MF, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q: Do you think RBI should have done more in its policy meeting to push growth and investment in the Indian economy?
A: My sense is that institutions such as the Reserve Bank of India (RBI) are closer to the ground on actual issues than some of us expect. It is just that they prefer a more gradualist approach.
They seem to be quite aware of the fact that the major issue is of transmission and of stimulating demand through system level changes without creating a moral hazard in other parts of the system.
In other words, it is a bit of tightrope walk for the RBI in terms of setting inflationary expectations as also on interference in the market mechanism versus pushing for growth.
The shift to an ‘accommodative’ stance at least makes this intent quite clear. There is no ruling out further measures but these may wait for the budget and a clearer understanding of the government borrowing programme.
Q: Where do you see the market going from here on?
A: Looking back it is easier now to say that macro had probably begun to deteriorate about six months back as the government spending slowed in the run-up to the elections.
Earnings growth continues to be elusive. The FY20E earnings growth is quite modest if you ignore the low base of FY19, which saw write-offs for the banking sector and one-off negatives in a large auto major with an international presence.
The quality of growth as indicated by the topline is not providing great comfort. Consumption growth is deteriorating on quality and quantity and the investment cycle has not really taken off yet.
In that sense, we have hit a kind of a lull phase for the markets and economy. Relatively speaking, India is still one where growth is visible on the global stage even if valuations on a historical basis are not inexpensive.
But, that said, there have been times where returns on a forward 12-month basis have had a lower correlation with valuations. So investors need to first look at their asset allocations rather than look to time entry and exit. Time in the market is always more important than timing the market.
Q: Do you feel that the broader market could outperform, and if yes, then why?
A: If you look at valuations on a forward basis, the midcaps' premium to largecaps has disappeared and it is near the long-term averages now.
Without a doubt, if India has to grow, and there will be many mid-cap companies that could become tomorrows’ largecaps. However, whether it will be the present set of names which have shown traction largely due to a consumption-led story or another set of companies that may be driven by focus slowly shifting to investment-led names is a matter that must be carefully examined.
I think there are several bottom-up opportunities in the midcaps and perhaps it is even time now to think a bit differently on how much premium one is willing to pay for growth expectations and if that growth is as dependable as it is made out to be.
Q: If somebody has to construct a portfolio now, what would be your advice?
A: One should first start with the asset allocation. Based on risk appetite and investment horizons, one should allocate towards direct equity, equity MFs, debt MFs, FDs and physical assets like gold and real estate.
Within direct equity one should ideally look for companies with a strong track record on business performance especially over the longer cycles and there is little overlap with one’s equity MF underlying holdings.
While ‘top-down’ analysis may be useful to understand systemic risks from global trade and policy stance, look for companies where the bottom-up case for the business is good especially in terms of its valuations.
Q: The auto sector has been on the sell list of both MFs and FIIs. Do you think this sector could emerge as a dark horse in the next 12-24 months?
A: Ultimately, it is a cyclical sector. Part of the sector is driven by domestic consumer demand, part by industrial or commercial demand and the rest mostly by export demand for ancillary equipment.
We have had a good tailwind on some of these demand drivers till recently, until a combination of bad news in term of regulatory requirements, tighter financing as well as the Indian consumer repairing her balance sheet along with a global slowdown have come together like a perfect storm.
Such unfavourable junctures are hardly surprising or unheard of as they have happened in almost every sectors at one point or another.
Point is this perfect storm will also blow over eventually. The long term case for Indian auto demand is well poised given where we are as a country in terms of demographics, economic growth, income and aspirations.
Q: What is your first take on March quarter results?
A: Unfortunately, underlying numbers are still not looking so good, especially if you consider cash flows as an indicator of earnings quality. Sales growth was muted for consumption names as well as for companies dependent on government spending.
There were mainly disappointments in consumer names and some of the PSU Banks and private corporate-focused banks.
Q: Do you think the current momentum in the market will continue?
A: When valuations are at extremes, it is easier to take a view one way or the another, but at most times valuations are somewhere closer to the middle of the historical range such as in this current phase.
Predicting the short term market is a mug’s game, better to stick to disciplined asset allocation with the understanding that staying invested is the most critical and perhaps the only strategy.
Q: How are we placed among emerging market peers?
A: In terms of relative performance, India is catching up as inflows post-elections have been healthy. This is likely to continue given the stable global commodity complex, softening rate regime and the government’s resolve to drive economic growth in its quest for creating more jobs.
Overall India will be difficult to ignore given its large domestic market especially as concerns grow on economic slowdown in the rest of the world.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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