DAILY VOICE | Market at elevated levels, investors need to be cautious and stick to their asset allocation: Sanjay Dongre of UTI AMC

Sanjay Dongre, EVP & Senior Fund Manager – Equity, UTI AMC, said that early withdrawal of monetary stimulus by US Fed may have some bearing on global liquidity which in turn may impact the global equity markets, including Indian market.

Dongre has been a part of UTI AMC for the past 27 years. In July 2000, he joined the Equity fund management team at UTI AMC and is currently working as Sr Fund Manager, Equity. Prior to joining UTI, he worked with Reliance Petrochemicals as an officer in charge of the Instrumentation Department.

In an interview with Moneycontrol's Kshitij Anand, Dongre said that if we go by the history of last 30 years, such a high valuation has never sustained beyond few quarters. Hence, investors need to be cautious and should be sticking to their asset allocation.

Edited excerpts:-

A) Post March 2020, all the major economies including India came out with all-time high monetary and fiscal stimulus to counter the slowdown caused by COVID-19.

Such a large monetary and fiscal stimulus convinced the market that it would lead to a V-shaped recovery in the economy and earnings. Hence, we had witnessed a V-shaped recovery in the stock markets.

From an economic point of view, a large monetary stimulus is leading to excess in the money supply which is inflating the financial assets like equity markets.

In the short term, there would be a disconnect between the real economy and the equity market. However, the excess liquidity may create its ecosystem in terms of growth, credit, and inflation.

Generally, equity markets are leading indicators and hence may move well ahead of the recovery in economy and earnings. Quarterly results of companies reported a significant reduction in other expenditure.

As per most of the management, part of a reduction in cost/expenditure are structural in nature. If this were to be true, then operating leverage could be a big surprise as the sales recover to previous levels.

This means earnings of the companies could recover to previous highs much faster than the market is expecting.

Valuations for the broader market are elevated when looked at various indicators such as 12-month forward P/E, trailing P/B, and Dividend yield.

As the valuations have moved significantly in the last 12 months, it needs to be matched by higher earnings growth for the continuance of the market rally.

A) At a Nifty level of 15500, the market is trading at elevated levels. On a 12-month forward P/E multiple basis, the market is trading at about 21 times compared to the last ten-year average of 16 times.

On a trailing 12-month P/B multiple basis, the market is trading at about 3.2 times compared to the last ten averages of 2.6 times.

If we go by the history of the last 30 years, such a high valuation has never sustained beyond few quarters. Hence, investors need to be cautious and should be sticking to their asset allocation.

Risk to the equity market at current valuations would be extended lockdown due to prolonged second wave of covid, delayed earnings recovery due to possible third wave of covid, high inflation and resultant high yields in the economy.

Early withdrawal of monetary stimulus by FED may have some bearing on global liquidity which in turn may impact the global equity markets including Indian markets.

A) UTI Infrastructure fund has done well among its peers on a three-and-a five-year period. UTI Infrastructure fund is focusing on the following a) EPC companies b) Cement c) Companies in gas supply chain d) Corporate-oriented banks e) Telecom.

Current valuations of EPC cos and corporate-oriented banks are attractive when compared to historical valuations. Early normalization of demand should benefit the cement sector.

Gasification of the Indian economy may continue to benefit companies in the gas supply chain in the medium to long term. With three players left in the telecom sector, an increase in tariff should reflect higher cash flow generations for the telecom companies.

UTI Multi-Asset Fund is a dynamically managed multi-asset fund and it invests in Equity, Debt, and Gold. For dynamically changing asset allocation, the fund uses a three-factor quant model.

The three factors are trailing P/B multiple of Nifty, 12-month forward P/E multiple of Nifty and Dividend yield of Nifty. As the valuations are elevated on all the above three parameters, the Quant model is indicating to keep equity exposure to the lower end of the range.

A) Systematic investment plan (SIP) is one of the routes to ride the volatility in the equity market. Another strategy to beat volatility would be to pay utmost importance to asset allocation.

At higher market valuations, investors need to have lower exposure to the equity asset class. At lower market valuations, investors should have a higher allocation to the equity asset class.

In order employ this strategy, an investor needs to follow valuation-based discipline while investing in the equity asset class

A) As India is a big importer of crude oil, higher crude oil price leads to a higher trade deficit leading to currency depreciation. Imports become costlier.

Higher fuel prices lead to higher inflation in the economy thereby putting pressure on yield and interest rates. Overall, it impacts all the domestic-oriented sectors.

A) Pharma sector is attractively poised from a risk-to-reward perspective. Structural growth opportunities in India, as well as global markets, may help it to deliver higher earnings growth in the medium term.

The automobile sector has been witnessing a downturn for the last three years. Demand could recover on the back of lower penetration and low-interest rates in the economy.

A) The recovery in the demand would be the function of following

a) Lifting of lockdowns post-second wave of covid

b) Higher pace of vaccination

c) Absence of the third wave of covid

d) Fiscal and monetary support to the sectors impacted by covid