Nikhil Walavalkar Moneycontrol News
Stock markets ended the calendar year 2018 on a volatile note and are exhibiting nervousness with the general elections around the corner.
In an interview with Moneycontrol, S Krishna Kumar, Chief Investment Officer – Equity, Sundaram Asset Management Company, offered insights into what he expects from markets going forward and how one should invest in equity mutual funds.
Edited excerpts.
Q: With the macro situation improving (falling crude, moderating rate hike expectations from US Fed, stable rupee and a benign inflation outlook in India), does it mean better times ahead for Indian stocks?
A: The global and domestic macro factors are definitely turning positive for Indian stocks. Though the markets look good over the long term, investors should not ignore near-term risks.
Impending general elections can hold the market in a narrow range. It is the uncertainty over the next government that is worrying investors. The Bharatiya Janata Party has suffered reverses in the recent state elections. Also, the government has to deal with many factors including farmers’ unrest in next six months to stay in power. The uncertainty regarding a stable government is unsettling investors. Investors would like to see some clarity on this issue before investing their money.
Another point of concern is the fiscal situation. The GST collections are lower than expected and the expenditures so far are in line with budgetary estimates. The government is planning to compensate farmers. There are other initiatives such as basic income scheme, Ayushman Bharat being discussed with a view to offer wider coverage. These may entail increased government expenditure. GST rates are being cut to help trade. There is a possibility that we may see higher expenditure and lower income.
Till we get some clarity on these two factors, markets won’t go up and may consolidate in a narrow range for some time. The Nifty may remain between 10,500 and 11,000 in the near future. Markets will see more upside as we get clarity on these in the form of a stable government, fiscal consolidation and more importantly, the growth outlook.
Q: Growth in corporate earnings has been a cause of concern in the past. What is your expectation in FY19-20?
A: We have seen some improvement in corporate earnings in past two or three quarters. The only laggard is the financials space. Because of increased provisioning, the financials have been reporting lower profits. Adjusting for financials, Nifty companies are reporting 10-12 percent earnings growth. For the full year, we should see earnings growth of around 14 percent.
For the next two years, companies should report compounded growth rate in excess of 18 percent. The trigger will be in the form of lower provisioning by the banks and lower credit costs. After the election uncertainty is over, the market will focus on earnings. If high double-digit earnings growth materializes, the markets will show significant growth in the long term. Given the healthy growth outlook, the current volatility offers a good investment opportunity for equity investors.
Q: Fearing a correction, investors keep waiting on the sidelines for events such as elections to unfold. What would be your advice to such investors?
A: Elections will ensure that the market remains volatile for the next three-four months. But very few investors can time their entry right. This has been seen in the past. During such events, investors choose to stay out of market thinking that there will be a massive correction. But the market recuperates quite sharply after the event, and not many are able to get back in at lower levels quickly. Timing the market is tough and investors will be better off investing in a systematic manner – be it through systematic investment plans (SIPs) or systematic transfer plan (STPs).
Q: What should be the asset allocation of an ideal equity portfolio? Why?
A: In 2017, we saw big outperformance of small caps over large caps. While small caps delivered an average 60 percent, large caps delivered around 30 percent.
The situation reversed in 2018. In 2018, large caps gave positive returns but mid-caps lost around 20 percent.
In December 2017, the small cap indices was quoting at a 20 percent premium valuation to that of large cap. Over the last 12 months, the valuation of mid and small cap indices is quoting at a 10 to 15 percent discount to the Nifty. We have seen a correction in valuation of small caps.
In equity portfolio, you should have around 50 to 60 percent in large cap oriented schemes and the rest in mid and small cap.
Q: What are the risks that can bring down returns on stocks in FY2019-2020? How do you intend to manage them?
A: We are expecting fairly sharp earnings growth led by corporate banking and cyclical stocks, going forward. We primarily intend to pick stocks based on the value they offer in the cyclical sectors such as corporate banking, capital goods, cement and autos. High price-to-earnings multiple stocks and high quality stocks tend to perform in line with market. There is a possibility that they will underperform cyclicals offering growth.
We intend to have exposure to cyclical stocks because they may offer high growth in future. The cyclical story may unfold over a period of time though there is no guarantee about the timing and quantum of the growth. In such circumstances, we would like to balance the risk reward equation of the portfolio by investing in the time-tested structural growth story of consumption.
Q: You have launched many closed-ended schemes earlier. But SEBI has come down hard on closed ended funds and has stopped giving permissions if the fund house has an existing open-ended scheme with a similar theme. How does stopping NFOs of closed-ended funds affect you?
A: In 2014-2015, SEBI was going slow on approving the launch of open ended schemes. So we took closed-ended scheme route to connect with our investors and distributors.
Most of our closed-ended schemes are focussed on themes such as micro-cap, small cap and value. These themes invest in relatively unknown small companies that are run by first-generation entrepreneurs. If the investors remain invested for an entire cycle, they can see good returns in these companies.
However, these being very small companies, they are likely to get impacted by changes in interest rates, government policies and structural changes in the sector. These investments are subject to volatility and we do not want our investors to sell at a point of maximum stress when the value of their investments is almost at the bottom.
The closed-ended structure helped in such circumstances to ride out the volatile phase. They do not allow investors to sell easily in such situations. We have seen investors holding their investments in the range of 13 to 20 months. We want our investors to hold their investments for at least five years. In the past, it has been observed that when investors are keen to hold for five years, they seldom lose money. So we wanted these schemes in closed-ended funds.
The more important thing is that the strategy has delivered a happy experience for our investors. Investors are sitting on returns of 25 percent compounded annually over past five years, in our closed-ended micro-cap funds that are going to mature this month.
After the categorisation and rationalisation of the mutual fund scheme norms, the approvals for closed ended schemes are difficult to get. SEBI will approve one if there is no open ended scheme with a similar objective. But SEBI has opened the doors for open ended schemes. There are 12 categories of equity-oriented schemes identified by SEBI. Each AMC is allowed to have one product in each category. We do not have schemes in many important categories such as large cap, value, multi-cap funds and dividend yield. We will launch new schemes in these categories and would like to build investor experience there.
Q: Banking, financial services and insurance sector (BFSI) is the largest sector in most portfolios given the weight it has in most of the popular indices. What is your view on BFSI?
A: BFSI plays a key role in a growth economy. India too will see a similar contribution by this sector. We have seen the beginning of financialisation of savings. More money should flow into financial assets. In this sector, there are opportunities in the business of lending, asset management, wealth management, insurance, online broking and other services. The penetration of essential services such as insurance is still very low. These sectors can grow multi-fold. Investors will see more market cap being created in financial services such as asset management, insurance and wealth management going forward.
Non-bank finance companies (NBFC) will remain relevant. Rather, they will play a role in various segments such as lending for commercial vehicles, housing finance and rural lending. Consumption is the big-structural story in India and companies funding consumption needs using online model or into fast-track lending should do well.
We will wait for the public sector banking story to unfold. The government is taking efforts to consolidate them. It may take a year or two. Investors have seen retail lending focussed banks do well in the past. Now there are investment opportunities in private sector corporate lenders and money is shifting slowly into this space. Going forward, private sector banks will continue to dominate portfolio allocation in this space. Investors should do well in this sector in the long term.
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