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Last Updated : Jan 22, 2018 06:04 PM IST | Source: CNBC-TV18

Kotak’s Harsha Upadhyaya sees volatility this year; likes consumption theme

The expert believes that it would be prudent to tilt the portfolio towards largecaps, where valuations are slightly better.

CNBC TV18 @moneycontrolcom

 

Equity markets have had a good run so far this year, returning 4-5 percent between the Sensex and the Nifty. Importantly, they have clocked fresh milestones frequently, with the 50-share index hitting 10,900-mark last week.

While some experts believe this is all a part of the bull run markets are witnessing, Harsha Upadhyaya of Kotak Mutual Fund cautions investors on volatility ahead.

“There are visible signs of earnings and economic recovery, but the macro situation is more challenging than what it was 12 months ago. Crude prices have risen and interest rates have hardened,” Upadhyaya told CNBC-TV18 in an interview.

To top it, the market may not be able to replicate the returns it gave last year. “Equity as an asset class was not volatile in 2017, but investors should be ready to expect more volatility this year. So, they must enter the market with a long-term investment horizon,” he added.

He sees rising challenges for fund managers like him along with ballooning asset size and valuations. In that context, it would be prudent to tilt the portfolio towards largecaps, where valuations are slightly better. Moreover, he expects supportive policies on agriculture, rural economy and infrastructure, among others. So, the investments could lie around these areas this year, he added.

Are there any stories to be avoided in this volatile scenario? “There are two and three-tier companies which are moving up and don’t have strength in fundamentals. So, continue to focus on fundamentals and look for such opportunities.

Among sectors, he is bullish on consumption space as he sees better volumes and margins based on cooling off of raw material prices.

Meanwhile, in case of financials, he prefers retail-focused private sector banks as well as insurance names. There is huge scope for these banks going ahead, he feels. While there are some positions on corporate lenders and PSU banks that the fund house has, he does not see the situation easing so soon for the overall sector. In fact, an additional negative is hardening of yields and hence, short term profits could be under pressure.

Speaking on Reliance Industries, Upadhyaya highlighted most of the company’s business is performing well and much of the capex is now behind. “This is going to be a period when they start getting operating leverage and continue to be positive on the stock,” he told the channel.

Below is the verbatim transcript of the interview.

Latha: Udayan says we are on the foothills of a climb if you take a three-year period. Are you getting that sense too?

A: From earnings recovery perspective, from economic recovery perspective, we are just starting to see some visible signs of recovery. But at the same time, the macro has been more challenging compared to 12 months back. Crude has risen to a level of USD 70 per barrel. We have seen interest rates hardening globally as well as in India. So macro has become more challenging, but as expected, earnings recovery is taking place and that gives confidence in terms of health of the markets.

But at the same time, one cannot expect or extrapolate what has happened in 2017 to get repeated in 2018. Equity is a volatile asset class, but if you look at 2017 not only in India, but globally, equity as an asset class did not show much of volatility. I do not think that is likely to continue. So we advise investors to enter equities as usual with long-term horizon, but have more moderate expectations compared to history. And also, they should be ready to accept more volatility as compared to what we have seen in 2017 I would say.

Sonia: I wanted to talk to you about the consumption space because we have had some really good numbers come in from the likes of Hindustan Unilever (HUL), Jubilant Foodworks, even some of the other smaller fast moving consumer goods (FMCG) companies like Jyothy Laboratories, etc. Are you seeing a big rural pickup and is this a space that you would bet on in the near future?

A: Yes, clearly the consumption growth has been picking up, not just in urban pockets, but also in rural pockets. So across consumption segments, we have seen uptick in volumes and we are going to see more of that as we go ahead. In many cases, the raw material prices have also cooled off quite considerably which means that as we head into the next few quarters, the margins should also remain quite strong. We have seen normalisation post goods and services tax (GST) transition. So all these augur well for many of the consumption segments. One needs to be focusing on most of them, I would say.

Anuj: So, as a fund manager, I guess the challenge is to invest the kind of money that is coming in every month at these elevated levels, especially in the midcaps. So, what would be the big themes year and what kind of expectation do you think the investor should have this year?

A: Clearly as asset sizes keep increasing, as valuations keep increasing, the challenges will increase. So that is going to be the theme for 2018 for domestic fund managers I would say. But as far as we are concerned, we continue to tilt our portfolio's mood towards largecap in our multicap funds. That is where relatively the valuations are a little bit better. In terms of themes, the consumption growth continues to be very strong. Along with that, we believe that there will be supportive policies on infrastructure creation, rural economy and also related to agricultural sector. So, these are some of the pockets where I think there will be further investments that will go into during the year.

Latha: Valuations have gotten stretched along with growth coming in and therefore, in the finance space for instance, where will your comfort lie?

A: We still have more focus on retail private sector banks and insurance names and that is where we believe there is huge scope for further growth. While we have some position in corporate lenders and some PSU banks, we believe the situation has not completely eased for them. While non-performing asset (NPA) resolution will start happening, the additional negative that has come for PSU banks for example has been the hardening of yields which means that at least for short-term, their profits are going to be under pressure. So to that extent, the tilt will remain towards private sector retail focused banks and insurance companies within the financials in our portfolios.

Sonia: Reliance Industries is a part of most of your funds. At this time around, what did you make of the earnings and more importantly the fact that telecom is picking up in such a big way, less than two years of its launch, it has now turned profitable in the telecom business. How much of an incremental upside do you think that could lead to?

A: Clearly, most of their businesses are doing well whether you look at petrochemicals or telecom. We have already seen much of capex behind us as far as the company is concerned. So this is going to be a period where they will start getting that operating leverage, not just on their manufacturing business, but also on their services businesses since most of the capacity addition has already happened in the past. And that is what we bet on when we took our position in the stock, quite some time back. And that is slowly panning out. So we continue to remain positive on the stock and it is part of our holdings.

Anuj: What should investors avoid this year because right now, everyone just wants to talk about what to buy? Is there anything that you would avoid right now in this kind of market?

A: Clearly, not just the leaders or the companies which are showing earnings growth are moving up, but there are also second tier, third tier companies which are moving up, which do not have similar strength in fundamentals. That is the pocket that one needs to be cautious about. It is not going to be an easy market to make money without volatility just like what we have seen in 2017.

So to an extent, one should continue to focus on fundamentals and look for opportunities from more of a medium to long-term view rather than what is going to happen over the next quarter or next six months because those tactical moves because they may give you a lot of money in the initial leg of the bull run, but you can also get caught acutely in those kind of investments if the markets were to correct. And our belief is at some point of time during the year, the volatility will definitely increase and one should be prepared for that.

Disclosure: Reliance Industries is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments.
First Published on Jan 22, 2018 11:01 am
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