Some of the issues like NBFC crisis are cyclical in nature and should be resolved over the next couple of quarters
Decent earnings momentum and reasonable market valuations have made Mirae Asset Mutual Fund positive on the financial sector, oil marketing companies and pharma shares, the company's Equity Fund Manager Ankit Jain said.
In an interview with Moneycontrol, Jain said that favourable demographics, increased penetration and gain in market share has provided comfort about the longevity of growth, making the firm upbeat on domestic consumption including financial stocks.
The fund house is also betting on export-led businesses because of good growth visibility; and select public sector utilities (PSUs) and oil marketing companies (OMC), as improved regulations will favour earnings and valuations.
Jain feels the organised sector will gain market share from the unorganised segment and have higher growth. The firm is also looking to invest in pharmaceutical companies because of the favourable valuations.
Commenting on the Budget he said that liquidity concerns were addressed to some extent by giving credit guarantee to public sector banks (PSBC) towards the purchase of non-banking financial companies' (NBFCs) pooled assets.
Jain felt, "issues like the NBFC crisis are cyclical in nature and should be resolved over the next couple of quarters."
He added that a global growth slowdown and relatively dovish monetary policy have led to most emerging markets seeing good foreign fund flows year-to-date (YTD). The Indian market with $11 billion inflows, received the highest inflow among other emerging markets.
According to Jain, "near term trigger for the markets will be the progress of earnings growth in the ongoing quarter as the market takes a cue from the earnings and management commentary."
Mirae Asset Mutual Fund has completed more than 10 years in India. The company's assets under management (AUM) stood at Rs 31,800 crore by June-end.
Edited excerpts from the interview:
Q: What is your take on the Budget 2019?
A: The Finance Minister did an apt work on outlining the government's long term policy initiatives and focusing on the path of fiscal consolidation (maintained fiscal deficit target at 3.3 percent of GDP), rather than taking any sweeping reforms to spur up growth in the near term.
On the whole, we believe the first Budget of NDA 2.0 is in-line with its long term thought process and putting in place structural building blocks to accelerate economic growth by keeping the target to reach $5 trillion GDP by 2025. On the revenue collection side, the government tried to increase taxes for very high earner category.
On the policy initiatives, government thrust on affordable housing continues with higher tax incentives. There was clear intent on electric vehicle (EV) penetration by lower GST and income tax incentives. On the banking sector front, the main agenda has been the recapitalisation of PSBs along with consolidation. RBI's powers have been enhanced to govern housing finance companies (HFCs) and NBFCs.
Liquidity concerns have been addressed to some extent by giving credit guarantee to PSBs towards NBFCs pooled asset purchase.
Q: Do you think market promoter shareholding norm is a dampener in the near term? What will be the impact of promoter shareholding norm in the long run?
A: The Finance Minister wants SEBI (Securities and Exchange Board of India) to consider raising the minimum public shareholding threshold in listed companies from 25 percent to 35 percent. Presently, around 34 percent of the NSE500 companies have promoter holding of >65 percent; which means a dilution of Rs 3.4 trillion at current prices.
As this has been a proposal from the Finance Minister and it will take some time before SEBI comes with recommendations. Eventual implementation might take more time and we see limited risk of immediate dilution.
On the positive side, this will increase weight in MSCI EM (emerging markets) indices leading to higher passive flows.
Q: Which are the sectors that the fund house is upbeat on?
A: We are positive on domestic consumption including financials because of the secular story of favourable demographics, increased penetration, and market share gain providing comfort on the longevity of growth;
We are also upbeat on export-led businesses because of good growth visibility, certain PSU names across utility and OMC space on improved regulations favouring earnings and favourable valuations.
We believe unorganised to the organised segment will help in gaining market share and higher growth for organised players, and pharmaceuticals because of the favourable valuations.
Q: Do you think investors have got reasons such as the deteriorating macroeconomy and the NBFC crisis to sell into this market? What is the bottom you are seeing for this market?
A: We see good risk-reward in the current market, more so in case of mid-caps as we see current mid-cap valuations are at a discount to the historical average.
We believe some of these issues like NBFC crisis are cyclical in nature and should be resolved over the next couple of quarters.
Q: What is your take on the midcap space? Is it a good time to look at midcaps for investments?
A: Earnings momentum in the mid-cap space has been fairly good in comparison to large-cap. During FY19, mid-cap earnings have substantially out-performed large-cap.
Historically, during the last 10 years, mid-cap earnings have outperformed large-cap by around 1.5 percent CAGR. Mid-cap have posted earnings CAGR of 8 percent vs 7 percent CAGR of large-caps during FY09-19.
From a peak of around 40 percent premium in January 2018, mid-cap valuations are now at ~20 percent discount to large-cap (vs historical discount of ~9 percent).
This has been largely on account of ~30 percent price under-performance and more than 20 percent earnings out-performance of mid-cap over large-cap in the past year.
Q: What are the important events to watch out for or what are the triggers for the market after the Budget?
A: Near term trigger for the markets is the progress of earnings growth in the ongoing quarter. The market will take a cue from earnings and management commentary.
Q: How is India placed among emerging market peers?
A: Because of a global growth slowdown and relatively dovish monetary policy, most of the emerging markets have seen good foreign fund flows YTD. The Indian market with $11 billion inflows has received highest inflow among other emerging markets.
Q: What are the cash levels in the schemes?
A: Typically we don’t take cash positions across funds.