India the worst major mkt in Sept Avoid lump sum bets, stay with SIP: Fund managers

Sensex down 3.7% in dollar terms amid economic growth concerns; in comparison, the MSCI EM index has lost 1% during the month

India is likely to earn the worst-performing major market tag for September. So far this month, the benchmark BSE Sensex is down nearly four per cent in dollar terms. In comparison, the MSCI EM index, a gauge for the performance of emerging market (EM) equities, has lost about one per cent during the month.

The correction in the domestic market has been more pronounced in the past fortnight with Indian markets dropping six per cent in dollar terms.

India’s relative underperformance is on concerns of an economic slowdown and a delay in revival of growth in corporate earnings.

India’s gross domestic product (GDP) grew at 5.7 per cent during the quarter ended June — the slowest in nearly three years. In order to infuse momentum, the government is now considering a stimulus package. But, economists fear such a move could widen the fiscal deficit.

On the other hand, corporate earnings have been muted for several years now. Analysts say, when the earnings revival cycle was getting ready to take off in late 2016, measures such as demonetisation and the goods and services tax (GST) had impacted the bottom line of India Inc.

“In the past two-three quarters, the economy has been reeling under the pressure of several reform measures. There are concerns about several segments, including capital expenditure spending, exports and no meaningful improvement in bank’s non-performing assets (NPAs). However, there is no need to panic at this point of time as the growth could rebound in the (next) few quarters,” said U R Bhat, managing director, Dalton Capital Advisors.

Escalating tensions between the US and North Korea have also impacted investor sentiment, not just in Indian markets but across EMs. The sharper correction in the Indian benchmarks was on account of expensive valuations of Indian shares, experts say.

Although the North Korean episode is not yet settled, the tensions are showing signs of easing. Market participants say, even if the issue flares up again, Indian investors should not be very concerned as its impact would be negligible and short-lived.

“We expect the markets to consolidate around current levels in the near future with a slight downward bias. The uncertainty regarding geopolitical tensions in the Korean peninsula persists and any negative development is likely to cause a knee-jerk reaction. However, it as an extraneous event to (the) Indian economy and is likely to have a very short-term impact,” said Arun Thukral, managing director, Axis Securities.

Interestingly, the South Korean markets have shown resilience even as the nation is embroiled directly in the stand- off with its northern neighbour. Kospi, the benchmark index of South Korea, has lost only 1.4 per cent during September. Market participants say improving consumption demand in the US markets, along with reasonable valuations, is helping Korea attract capital flows. Brazil, whose market tumbled between May and July due to a political crisis, made a strong comeback in September, with its benchmark Ibovespa index gaining nearly three per cent.

However, portfolio flows have been negative across EMs, as foreign funds seem to be chasing safer havens.

India has witnessed foreign institution investor (FII) selling to a tune of $1.3 billion during September. Others, including South Korea, Taiwan and Indonesia, have also witnessed similar selling, data showed. The five per cent fall in share market prices over the past fortnight is not enough reason to make big lump sum investments, say mutual fund (MF) managers.

One should continue through the Systematic Investment Plan (SIP) route, as it is impossible to time the market, they add.

Most fund managers have a cautious stand, as the earlier sharp rally this year, without earnings support, has made valuations expensive. Stocks continue to remain expensive even after the latest correction, they add.

In three years, domestic investors have pumped ~3.45 lakh crore in equity oriented schemes. Further, equity schemes are getting incremental flow of ~10,000 crore every month; about ~5,000 crore is through the SIP route.

With sluggish economic growth and lack of private sector investment, a sharp revival in earnings could be several quarters away, say money managers. Navneet Munot, chief investment officer (CIO) of SBI MF, says: “Given the current valuations, investors need to moderate their return expectations. Investors should continue with SIP, as this mode of investment is more of a discipline and helps them take advantage of market volatility. At this stage, lump sum investment should depend on risk appetite, asset allocations and investment horizon.”

Annualised return for the past three years are in the high teens for most equity schemes. Money managers say this could be difficult to sustain.

Mahesh Patil, ex- CIO at Aditya Birla Sun Life MF, says: “At the current stage, it may not be advisable for investors to put lump sum money in stocks. Investors must tone down their return expectations. If there is a correction of, say, around 10 per cent, they may use such opportunities to make additional investments. Meanwhile, balanced funds with a dynamic asset allocation feature should be increasingly looked at. However, those with SIP should continue, not stop, to reap the benefits of volatility.”

A lot of fund managers believe the markets could slip further from current levels and investors should brace for volatility. “The benefits from various government policies should have yielded results by now. However, the wait is getting more prolonged. It won’t be surprising if the Nifty (the National Stock Exchange's benchmark index) drops to 9,000 levels. If that happens, it remains to be seen if investors panic or continue with monthly investments,” said a top fund manager, asking not to be named.

He says investors ought to prefer large-cap stocks over mid-caps and small-caps.

Assets under management (in the MF sector add now to about ~20 lakh crore. Of this, equity is a little over ~7 lakh crore.

Analysts say, when the earnings revival cycle was getting ready to take off in late 2016, measures such as note ban and GST impacted the bottom line of India Inc