Rise in liquidity, fall in interest rates will make equities a preferred asset class: Tata MF

Sonam Udasi, Senior Fund Manager, Tata Mutual Fund, recommends select buying in midcap stocks and rural recovery plays. He feels equities as an asset class will remain attractive in 2020 given the surfeit of liquidity.

Edited excerpts:

Q: Coronavirus has become a ‘worry’ from markets across the globe from a ‘concern’. What is the way ahead for the Indian market?

A: In the present scenario, while the price-to-earnings (P/E) valuations of Nifty has corrected to a more reasonable level of 18 times, which is also its 10-year average, it is still not in the attractive zone.

So, the recovery from the coronavirus outbreak could also be slow and gradual.

Even from a global context, ample and easy liquidity has supported equity valuations at higher levels over the last 10 years. This is very different from the 2002-03 scenario where valuations were cheap after the tech bubble.

Q) What is leading to the sell-off in the Indian market? Do you think it could intensify if the coronavirus outbreak escalates?

A: China is a large supplier of raw material, components and intermediates for textiles, pharmaceuticals, chemicals, consumer durables and electronics. The decline in Chinese export capacity will impact India's output and exports from these sectors.

Our interaction with Indian corporates indicate that inventory levels are adequate. With some of China’s capacities coming back gradually, they don't expect the situation to get worse.

Earnings of commodity-driven companies would be impacted as the global slowdown has impacted commodity prices including crude oil.

Foreign institutional investors (FIIs) also fret when US markets and economy tend to give worrying signals. So, it becomes a risk-off mode for them.

Q: According to a recent Reuters poll, experts have trimmed their Sensex and Nifty target for December 2020 on account of global cues. What is your target for the year and have you also tapered your expectations?

A: While we do not put out explicit index targets, I think earning expectations have gotten toned down over the last one-month. That being said, whatever nominal GDP growth India achieves over the next one-to-two years, index levels should mirror that in terms of return.

Q: It looks like inflows has started moving from equities to safe havens like gold and other fixed income products. Do you think the fixed income space could outperform in 2020?

A: Fixed income tends to do well when interest rates come off. This has started happening in the US and certain other parts of the globe. Looks like the recent US Federal Reserve action has given the Reserve Bank of India (RBI) room to cut rates further if they so desire.

To that extent, debt market returns can continue to surprise. But there is a limited room here. Equities generally come back strongly when interest rates become lucrative to take more risk. We feel equities will be an attractive asset class in 2020 given the surfeit of liquidity.

Q: How should investors play the massive fall that we have seen in the last 15-30 days? Is it the opportune time to create long-term wealth? What does history suggest?

A: While India is still at risk of coronavirus spreading, the earnings impact can be much wider than what we have discussed above. The earnings growth of Sensex companies remained quite robust during the SARS outbreak in 2002-03. But SARS was less infectious than what coronavirus is proving to be, therefore India is not completely out of the woods.

Q: What should be the investment strategy of investors with respect to mutual funds? This is usually the time when investors stop their SIPs.

A: Equities is one of the asset classes in an investor’s portfolio. Everyone’s portfolio should have an allocation to equities on a consistent basis.

Mutual funds are great instruments to participate in India’s growth prospects and SIPs within the same allow an investor to grow their equity exposure in a smart and measure manner. I believe volatility is an investor’s friend.

Q) Any value buys with respect to stocks or sectors that are looking attractive?

A) In the case of a gradual economic recovery and assuming no major impact from the coronavirus outbreak in India, we will continue to build our portfolios around earnings stability and identifying stocks with the potential to beat earnings expectations, thus providing alpha. Selective bottom-up midcap stocks and rural recovery plays remain in focus.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.