With the streamlining of the GST system, businesses should start accelerating, especially the organised ones, says Sachin Trivedi, senior vice-president (SVP), head-research and fund manager, UTI AMC.
What will this financial year be like for the Indian equity markets? Which sectors, do you think, are the right places to be in right now?
Broad market earnings for the next two years are expected to grow at 20%-plus CAGR (compounded annual growth rate) on Bloomberg consensus.
Unlike the past few years when we start the year with similar expectation but end up with single-digit growth, this time earnings visibility is better as the chunk of growth contribution could come in from normalisation of profitability of banking space. However, valuations for the broad market are on the higher side (Nifty is trading at 18x (having a price to earnings, or P/E ratio of 18) plus one year forward on Bloomberg consensus), leaving little room for disappointment.
At present, private sector banks with adequate capitalisation are better placed. Cement is the other area we like, where volume growth has been healthy and the sector has also seen some pricing power with moderation on raw materials.
What is your investment philosophy? How do you select stocks?
Investment strategy involves picking stocks with strong earning quality (high operating cash flows) and those that have strong growth potential in the medium to long term. I also look at opportunities where companies have growth challenges in the short term but medium term outlook continues to remain strong.
Valuation of underlying stocks would be the function of growth outlook, cash flows and return ratios.
Going by fundamentals, do you think the Indian market is trading at fair value?
In the last couple of years, businesses have faced certain challenges due to certain policy decision like demonetisation and uniform tax system (Goods and Services Tax or GST). Now, with the streamlining of the GST system, businesses should start to accelerate, especially the organised ones. In which case, there is a possibility of earnings growth momentum improving in the coming years. Although valuations for the broad market are on the expensive side when compared to longer term averages, better growth visibility should lend support to these valuations.
Have you seen any change in the investment patterns of investors in mutual funds (MFs) in recent times?
On the equity side, one clear trend visible is contribution of systematic investment plans (SIP) to the overall industry flows. SIP flows on monthly basis has increased from around ₹3,000 crore in April 2016 to ₹8,000 crore-plus in March 2019.
At the current run rate, SIP inflows could contribute about ₹1 lakh crore to the equity AUM (assets under management) per annum. This money is a lot more stable and is allocated by investors as longer term savings. Even in times when lump sum flows are negative, these flows add to the stability of the market.
What are the major challenges and opportunities for the MF industry in India now?
The mutual fund industry has grown significantly since 2004, but its share in financial savings is still relatively small (low single digit of around 3%) compared to some of the developed markets like the U.S.
This low contribution is despite investor-friendly taxation and regulatory framework in the country. While real estate, gold and fixed income products are the preferred choice of investment for a majority of households, some of the equity schemes have delivered superior performance to these alternate asset classes. Further, equity MF schemes offer better liquidity and are more tax efficient. In order to pull more savings into this asset class, the MF industry has to continue to focus on greater investor education.
What kind of equity funds would you advise for investors at this point in time?
Equity, as an asset class, is volatile in nature. The way to approach this market is to follow good asset allocation strategy and not trade on a short-term basis. Over the long term, equity has given better relative returns. My suggestion to investors is that they should firm up their asset allocation plan and rebalance the portfolio regularly.
This discipline will help them achieve their long-term goals. Within equity allocation to mutual funds, a large part of the investment should go towards diversified schemes and only 10-15% of allocation should go to sector/thematic schemes.
Could you tell us about the performance of UTI Transportation & Logistics Fund and UTI Focussed Equity Fund?
UTI Transportation and Logistics Fund is a unique play on rising income levels and improving aspirations of Indians. Further, it also provides an opportunity to invest in the “Make in India” theme as a large vendor base, which is catering to the needs of India’s auto OEMs, has also developed capabilities to serve the demand of global OEMs. The fund also invests in the logistics space wherein, after GST, business opportunities will be significant and are likely to endure over many years to come. At present, the fund has close to 83% investment in auto and auto ancillaries and between 12 to 14% towards logistics. UTI Transportation and Logistics Index, ending FY19, has given 4.03% and 8.76% returns in three and five years respectively whereas UTI Transportation and Logistics Fund has given 4.26% and 15.34% return in three and five years respectively.
What impact will elections have on stock markets?
The markets certainly watch out for political developments in the run up to the elections. Events such as general elections lead to a lot of noise and consequently, volatility is seen in the markets for a few months on pre and post-election outcome. However, for long-term investors wanting to generate wealth, it would be advisable to shut his or her eyes and ears and control the urge to act.
Past data suggests that apart from the initial knee jerk reaction, there is hardly any positive correlation between the strength of the government and the stock market returns over the tenure of that government.
What investor should keep in mind is that in the long term, the sustainable returns in the markets are driven by the underlying corporate earnings growth. It is worth mentioning that ever since the economy opened-up in 1991, successive governments have only carried forward the reforms process and there have not been reversal of policies.
