Commodity consumers such as automobile and auto ancillaries have kept Anil Ghelani, who heads Passive Investment and Products at DSP Mutual Fund, bullish on opportunities waiting to be unleashed. Healthcare is another front that appears attractive to the seasoned fund manager.
US generics and pharma appear to have attractive margin of safety and are placed for better growth prospects, he shares in an interview to Moneycontrol.
That's not all. There's one more space where he has a contra bet: the IT sector. "While many people are negative about it, structurally, I believe that at current levels, valuations are approaching average multiples, and many companies appear financially healthier and relatively more attractive when compared to global IT peers," says the chartered accountant with over 25 years of experience in fund management. Excerpts from the interview:
A longer-than-expected rate hike cycle, slowdown in Europe, weak economic data points from China. What's your take on the uncertainty in the global markets?
It is important to keep global risk events in mind. Let’s assume that even if there are no unexpected risks like a geopolitical crisis, there is still a global growth risk. The global economy has various drivers for growth, from which three large engines - the US, Europe and China - are moving slow currently. In the US, the Federal Reserve is prepared to keep interest rates high and actively shrinking its balance sheet via quantitative tightening.
Many European countries have already declared that they are in recession or data indicates that they are in contraction. China is also going through a deflationary phase with both its wholesale and retail inflation readings in deflation, coupled with declining industrial profits and patchy retail demand. The slowing of these three engines is likely to weigh down on global growth and the outlook for several growth markets, including India.
That said, there's another angle to global uncertainty. Global investors may look to increase their allocation to a country like India where there is economic stability, a stable political regime, and a domestic consumption-driven theme, which has seen a structural growth. This could result in a good opportunity amid an adverse situation.
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Two sectors where you have a super bullish view...
One sector we see opportunity in would be commodity consumers like auto and auto ancillary. Across the board, passenger vehicles, commercial vehicles, and ancillaries are in good shape and these companies are witnessing encouraging demand.
The other sector would be healthcare, which had remained undervalued for quite some time and there is a chance that it will gradually see a good recovery. US generics and pharma appear to have attractive margin of safety and are placed for better growth prospects.
If I may move from two bullish sectors and add one more, which is a contra bet, that would be the IT sector. In recent times, the sector has been out of flavour. While many people are negative about it, but structurally, I believe that at current levels, valuations are approaching average multiples, and many companies appear financially healthier and relatively cheaper attractive when compared to global IT peers. Certain stocks may have a little bit of downside, but on a broader level, it would be a good sector to bet on from an investment point of view to bet on a turnaround in the medium to long term.
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What kind of funds are getting the maximum demand from investors now?
Investors have been cautious in the last few months in committing large exposures. However, inflows have been healthy through the systematic investment plan or SIP route and have favoured the mid-cap and small-cap segments of the market. Hybrid funds and multi-asset funds also witness a lot of investor interest recently.
Passive Index Funds and ETFs continue to see good demand and garner fresh investor interest and inflows. Passive Funds investing into equities have now grown to ~22 percent of total equity assets of the mutual fund industry.
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I believe Passive Funds can assist in a big way to increase penetration to new investors who have yet to start their investing journey. This is because they have relatively lower cost and simpler so it can give investors a very clear understanding about their risk and return outcomes.
We at DSP are doing various investor education initiatives to increase awareness, such as our recent #LetsIndex campaign focusing on the simplicity of index funds which can be a good starting point.
Do you expect the equity market to consolidate till the official announcement from the Fed for ending the rate hike cycle or is the market least bothered about the Fed and worried about other reasons?
I assess equity markets with the C-F-E framework, where C stands for corporate earnings, F for flows, and E for event risks. Corporate earnings have grown well from the previous peak of markets in October 2021. We have seen Nifty50 earnings per share grow at a healthy 30 percent from 650 to 850, so today with Nifty50 at 19,500 levels, we are trading at 23 times trailing earnings. While this is lower than 28 times which was seen in October 2021, it does indicate a limitation in the potential valuation upside.
Looking at flows, last year (CY2022), global investors had taken out $16 billion, but this year till end of July 2023 itself we have already seen inflow of $15 billion. So, while we might continue to see inflows, we could see a moderation in the pace of flows in the next few months.
Slowing global growth and tightening liquidity at a time when interest rates are high signals caution at this time. In particular, companies trading at very high valuation multiples that are unable to show extraordinary profit growth can come under a spell of correction.
Does the staples sector look interesting?
The domestic economy has seen a mixed recovery. The rural consumption recovery is gradually underway and there are signs that this could strengthen if the monsoon and sowing season progresses well. Decline in commodity prices has helped commodity users like FMCG companies to improve their margins.
One must be very selective and driven by company trends to ascertain investment opportunities in the sector. Selected companies may offer tactical opportunities in this space as profitability improves over the next few quarters.
Your take on the midcap and smallcap space which have smartly outperformed the benchmarks...
The valuation differential between large-caps and the mid and small caps, currently is in positive favour of the smaller companies. For instance, in India, large-cap stocks are trading at 23 times the trading valuations as per frontline index Nifty50, while the small-cap indices are trading at 18.5 times trailing earnings.
Similar numbers for the US are 19.6 times for large-caps and 16.5 times for small-caps. Foreign investors usually focus on large firms due to impact costs and market cap limits but are known to focus on stocks where earnings growth is steady.
Once the broader market and frontline indices correct to long term average valuations, it would be prudent to look at mid and small caps space more closely for long term opportunity.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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