Union MF's Vinay Paharia: We're overweight on IT, energy stocks; underweight on financials

In terms of market movement, he expects the equity market to remain volatile responding to incoming events and data.

He also said that the outcome of state and central elections is likely to add to the expected volatility.

Excerpts from the interview:

 Q) This year has been a roller coaster ride for the markets although in the past few weeks it has started looking a lot better. How do you see the new calendar year panning out for the markets?

Volatility is an inherent characteristic of equity as an asset class. Hence, we expect the markets to remain volatile responding to incoming events and data. Thus, while headwinds related to rising crude prices have abated, the economy is expected to witness some softness in the near term due to a slowdown in government spending, a slowdown in consumption due to the impact of reduced credit flow from NBFCs. Also, the outcome of state and central elections is likely to add to the expected volatility.

Over the medium term, we expect our economy to bounce back led by a cyclical improvement in investment demand and rebound in consumption demand.

Q) We will be entering the general elections year. What is the sense you are getting from the market? Do you think participants have priced in a worst-case outcome and if that is not the case will we see a big rally?

Markets respond with significant volatility to events such as outcomes of the election, budget announcements among other things. However, over a medium to long-term, markets have tracked the change in intrinsic values. Hence, we do not try to forecast the outcome of such an event. Also, we do not position our portfolios based on outcomes to any specific events.

Q) Indian macro scenario has suddenly changed. Crude prices are coming down. The rupee has appreciated almost 4 percent and bond yields are also down by 40 bps. How do you read the change in macroeconomic weather suddenly?

The decline in crude oil prices is a significant relief. It could have posed meaningful macro-threat to our economic growth had it remained at elevated levels. This decline also provides wriggle room to the government to manage its budget while continuing to spend for development.

Q) Which are the sectors that you are upbeat on and which are the ones you are running an underweight position?

We are overweight on  IT (growth at a reasonable price) and energy (attractive valuations) sectors and underweight Financials (growth and margin headwinds, unattractive valuations) and Materials (dearth of quality businesses) sectors.

Q) Mid-cap stocks have been beaten down quite a lot in the last few months. What is your assessment?

While Nifty Midcap Index is down 17.3 percent on a YTD basis, it has outperformed its large-cap counterpart (Nifty Index) by 6.2 percent CAGR over last five years. Though midcaps have corrected from the peak, the aggregate valuations for the set are not very attractive. However, bottom-up stock picking opportunities continue to exist in the midcap space due to diversity and quantum of stocks available in the category.

Q)  What are the cash levels in your fund?

We construct portfolios which are true to mandate. Thus, only such funds which are supposed to utilise asset allocation lever, shift allocation from equity to fixed income and vice-versa based on our internal valuation models. No other equity funds from our fund house take any cash calls.