Union Asset Management Company Chief Executive Officer G Pradeepkumar is upbeat about Indian equities and expects the Nifty to grow steadily over the next five years though he doesn’t rule out some near-term volatility.
Union AMC is overweight on consumer discretionary, financials, telecommunication and industrial and capital goods, says Kumar, who has been in the thick of the mutual fund industry for more than 30 years.
In an interview to Moneycontrol, he says RBI’s decision on a rate cut will be driven by data but the monetary policy committee commentary and the inputs, so far, point to a possible cut by the end of this calendar year. Edited excerpts:
Any thoughts on the US Federal Reserve meeting outcome? Have you seen any kind of concern in the commentary?
The market was expecting a 25-bps hike with a dovish undertone. In our opinion, there was no surprise there. In both, the commentary as well as in the press conference, there were sufficient hints to indicate a dovish undertone.
Inflation remains a concern but 500-bps of cumulative hike, ongoing balance sheet reduction and tightening credit conditions by the recent collapse of small and mid-sized US banks should help in bringing down inflation.
Do you see pessimism in any sector's commentary in this earnings season?
As of yet, we have not come across any major challenges highlighted by any particular sector. Concerns, if any, appear to be company-specific but since we are only halfway through the result season, we will take stock of the situation by the first week of June to confirm this opinion.
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Do you expect double-digit earnings growth in the coming years? Which sectors are the leaders?
We view equity markets from the perspective of intrinsic value, as we believe that stock prices follow intrinsic values over a period of time. Based on our internal research, Nifty's intrinsic value is likely to grow at a decent pace.
Given the strong economic growth potential, we expect multiple sectors to benefit from this opportunity. We categorise our areas of interest into three categories:
In the near-to-medium term, we believe that industries linked to the manufacturing sector will see strong business momentum. Aided by our government's policy actions, India will play an increasingly prominent role in the global supply chain.
We opine this from various initiatives like (1) tax rate cuts, (2) Production Linked Incentives (PLI) schemes and (3) capital expenditure-focused budgets. Hence, industrial consumables, industrial products and capital goods may see strong business momentum over the next five years.
Secondly, the fast-increasing per-capita income is expected to drive strong growth in private consumption. Given that our nominal GDP is likely to grow at 10 to 12 percent and our population is growing at about ~1 percent, we can expect an average Indian's per capita income to rise by 9 to 11 percent annually.
Consumer-facing industries like organised jewellery, branded apparel, quick service restaurants, consumer electronics, etc, will likely benefit from this phenomenon.
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Last, but not the least, our financial system will be critical to support this growth potential. Equipped with well capitalised balance sheets, we believe that the leading financial institutions, banking as well as non-banking, are well-positioned to fund India's economic growth and profit from it too.
Are you bullish on the PSU space?
Our investment process is designed to appraise each company dispassionately, whether private or public owned. Our stock selection process is designed to focus on companies with (1) strong growth potential, (2) above-average return on equity and (3) consistency in these parameters. We find quite a few PSU companies that qualify for these criteria and are part of our portfolios.
Do you see a big challenge for the equity rally?
While there can be near-term volatility, we are bullish on Indian equities from a five-year horizon. As mentioned above, we look at markets from the lens of intrinsic value. At the time of this interview, the Nifty is trading at a moderate premium to fair value. This may cause some short-term volatility.
But as per our internal research, the fair value of Nifty itself is expected to grow at a decent pace over the next five years, which supports our bullish stance.
Sectors that one must have in the portfolio for FY24?
For the reasons mentioned in the previous question, we are currently overweight on consumer discretionary, financials, telecommunication and industrial and capital goods across our portfolios.
Do you think the RBI will start thinking about rate cuts towards the end of this calendar year?
The decision to cut rates would be data-dependent but with the MPC (Monetary Policy Committee) commentary and incoming data so far, it appears that there is a possibility of a rate cut by the end of this calendar year. However, it’s tough to forecast three quarters out these days, given the dynamic market.
Still, when you are in tight monetary policy territory for a sufficiently long time, there could be some sacrifice on growth. Any rate action by RBI will also be influenced by external factors, including the Fed policy and geopolitical situations going forward. Monsoon and oil prices remain key risks.
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