The market is likely to move higher in the coming quarters unless there is an unexpected poll verdict, says Manish Gunwani, chief investment officer - equity investments at Reliance Mutual Fund where he manages assets worth almost ₹95,000 crore. Excerpts:
How do you see the stock market moving as election fervour reaches a crescendo?
The general election is an important binary event in the short-term. What we have seen in the past is that irrespective of the election outcome, market quickly adjusts and the entire focus shifts back to fundamentals. The good news here is, business cycle has bottomed [out] in India. Market is currently at an interesting stage where expectations of a sustained up cycle has started to build-in. Unless we have some really nasty election outcome which creates medium-term uncertainties about India's outlook, the market is likely to move higher in the coming quarters.
Markets recently touched new record highs with the Sensex breaching the 39,000-mark for the first time ever. What would you attribute the rally to?
[The] Indian market [has been] in a very narrow range in the last one year. There are a couple of specific factors which are helping the market to possibly break on the upside. First is the global market strength. Since the December 2018 lows, MSCI World [Index] has rebounded by 19%. Emerging markets, too, have risen by around 15%. The benign global backdrop has helped Indian markets to rise. Secondly, post the escalation of India-Pakistan conflict in February 2019, market has started to increasingly anticipate the second term for the NDA government. So, increased hope of political stability along with benign global backdrop has contributed to this rally.
Foreign flows have been quite strong in the recent past and are being looked upon as one of the reasons for the recent rally...
Over the last few years, FII positioning in Indian equities has consistently declined. Excluding the passive inflows, India has witnessed net outflows from the active FIIs between 2015 to 2018 as they reduce India's overweight to neutral. Since the December 2018 lows, emerging markets in general have received significant inflows. Flows towards India in particular accelerated from February 2019 as market started to assign higher odds to a benign election outcome.
In the last three months, FIIs have infused over ₹50,000 crore in Indian equities. This is the highest three-month inflows that India has received since [the] NDA victory in 2014. Despite such large inflows in the short period, FIIs overweight on India is at a multi-year low. Unfortunately, India could not provide earnings growth leadership in the last few years and that has led to decline in FII overweight. With business cycle recovery clearly visible and the improved odds in India's favour to regain earnings growth leadership, there remains considerable scope for the FIIs to catch up in coming years. So, unless there is some major political accident or policy mistake globally, the flows towards India should be buoyant.
How do you see the mid-cap and small-cap segments performing this year?
After a stellar run in 2017, broader markets significantly underperformed in 2018. There were clearly some excesses in the form of elevated valuations and ownership which were apparent at the end of 2017. Most of these excesses have been corrected as mid and small cap stocks have undergone a sizeable time and price correction. There has been some improvement in the broader market sentiments but mid and small caps are still underperforming at the margin even in the ongoing rebound. From their 2018 highs, most stocks in the broader market are trading at significantly lower levels. Despite correction, the valuation for broader market is still not inexpensive. That said, there are select pockets looking attractive within the mid and small cap space now. These opportunities are visible across sectors. There could still be some nervousness till the elections, but once the elections are behind us, broader market may start to see increased traction.
Which are the sectors that you think investors should look at investing? Banks and NBFCs have been in the news for long..
When it comes to earnings, corporate banks are likely to lead the recovery. With falling interest rates, peak NPAs, reduced competition from the NBFCs and rising credit growth, banks are looking attractive despite the recent outperformance. Beyond that, there are good risk-rewards available in many sectors. From medium-term perspective, investors would be better off preferring cyclicals versus defensives, value versus growth and beta in general.
A latest analysis by Crisil said that the growth in assets of the mutual fund industry in FY19 was the slowest in seven years. What do you think is the reason behind this slowdown?
There has been some outflows from mutual funds in the recent months but those outflows are restricted to debt and arbitrage funds. For the full year in FY19, equity inflow was ₹1.12 lakh crore, as against ₹1.5 lakh crore in FY18. There has been some slowdown which could be attributed to weaker performance of the broader market for almost one year. The news flow during the last year was also not as encouraging and that also impacted the retail sentiments. The dip in flows was essentially in the lump sum category while SIPs continued to grow even in the troubled environment. Since the market is now recovering and news flow is getting better, one should expect mutual funds inflows to improve. In fact, some improvement is already visible as for the first time in March, equity inflows surpassed SIP after November 2018.
