Equity-linked saving schemes have outshone the regular, diversified equity funds over the past few years

In spite of the current stock market rally, the focus is still on quality and the entire market will not start flying all at once

T he liquidity-driven market rally in India has made investors fearful of a massive and long-term correction. However, Aashish Somaiyaa, Managing Director and Chief Executive of Motilal Oswal Asset Management Company Ltd (MOAMC), thinks a down trend will not last long. In a conversation with Renu Yadav of Money Today, Somaiyaa discusses the current bull run, most lucrative sectors, earnings and returns, and why the US Fed’s rate hike may not affect the Indian market just yet. Edited excerpts:

Markets are now trading near lifetime high. Do you see a correction in the near future?

By philosophy, we at Motilal Oswal AMC are market/index agnostic, bottom-up stock pickers. So, at any time, we are more concerned about the earning power and valuations of some 15-20 holdings we have in our portfolios. Having said that, one can visualise a bit of a lull in the markets in the near term considering we have seen a significant run-up on a year-to-date basis and all triggers such as earnings season and rainfall predictions are now out of the way. There could be a potential upside if there is a surprise out-of-turn rate cut by the central bank. Even if there are no triggers, any decline in the markets is likely

to be short-lived as both investors and funds are flush with cash.

What is your take on valuations of stocks across market segments?

We focus on valuations, but we see them as purely contextual. For companies which are in secular sectors such as mortgage and consumer finance, insurance, white goods and autos, there has been earning growth supporting the valuations. On the other hand, the economy seems to be coming out of a trough and markets are looking towards higher growth in the near future. At such junctures, valuations are bound to be slightly above comfort; it is but natural. Also, keep in mind that a dramatic decline in interest rates results in valuation multiples being re-rated.

With one more rate hike by the US Fed likely this year, is it a threat to the Indian stock market?

I have always seen rising US rates as a sign of economic confidence. The massive quantitative easing and the near-zero-rate regime were spawned to engineer a recovery in the western world. With the economies doing well, it is but natural that the stimulus has to be withdrawn. Early stages of rates hikes will be seen as economic confidence. Only if we see sustained rate hikes, it could be seen as a sign of emerging inflation and the need for economies to be cooled. We are some way away from that stage.

Which are the preferred sectors you are betting on?

We are usually sector agnostic in our approach, but yes, our quest for high quality, high growth companies means we are more likely to be staying away from commodities, cyclicals, leverage sectors and ‘turnaround’ stories. More often than not, we find ourselves betting on secular, multiyear growth stories like private sector banks, non-banking financial companies, insurance, white goods, home improvement, autos and so on.

What are the near-term threats that can halt the current rally?

International developments or geopolitical issues could be a threat. Closer home, the revival of certain core sectors, policy-sensitive sectors and wholesale banks continues to play spoilsport. One has to focus on quality. We are not yet close to a secular rally where the entire market starts flying. It is still a stock-picker’s market.

Do you see earnings recovery in the coming quarters?

Already there are early signs if one looks at the recent quarter and the numbers of the financial year 2017. We have to watch for sustenance over the next couple of quarters. We do not worry too much about the broader market as long as we can deploy our research expertise to pick 1520 companies, which will double their earnings every three-four years and which demonstrate sustained earning power.

What is your advice to investors?

In India, investors are usually underinvested in equities. I am happy that it is getting corrected over the past two years and I am happier as people have enjoyed good returns. My advice is – do not get carried away by extrapolating past returns. Expectations need to be toned down. When inflation is 7 per cent, it is normal that a 10-year bond will yield 8-9 per cent while equity gives you a longterm average of 15 per cent. But when inflation settles near 4 per cent, a 10-year bond will give you 6-7 per cent, and equity returns will be down as well. In such a case, one must expect nominal equity returns to go down although real returns will still be great.

“THE ECONOMY SEEMS TO BE COMING OUT OF A TROUGH AND MARKETS ARE LOOKING TOWARDS HIGHER GROWTH. AT SUCH JUNCTURES, VALUATIONS ARE BOUND TO BE SLIGHTLY ABOVE COMFORT”