❝Investors need to be prepared for increased gyrations in asset prices❞
- Saravana Kumar, CIO, LIC MF
What is your view on the markets for H22017?
We are quite constructive on the equity markets for remainder of FY17 due to India’s macro-economic construct, undergoing structural changes and likely improvements in the corporate profitability. Due to recent rally in equity markets, we have turned cautious tactically. At elevated market levels, valuation multiples themselves bring in implied risk. Our thesis is H2FY17 would see more strategic steps towards solving some of the structural issues faced by the economy and would also see renewed interest in completion of earlier initiatives. Though valuation is a cause of caution, we remain positive from longer term perspective.
How has the Q1FY18 earnings season been? What is your expectation on earnings in the coming season?
Q1FY18 was quite a mixed bag. The corporates were occupied with getting ready for and implementation of GST. GST destocking clearly had repercussions on consumer companies. Most impacts were in line with what was envisaged earlier. Financial houses were occupied with concerns on assets performance. Macro factors like rupee appreciation impacted export0oriented industries like IT and pharma.
Normal monsoon till date, stable currency and abating pressure on asset quality are key themes for upcoming season. Some companies which are well prepared for GST may be able to deliver surprises on account of efficiencies achieved in supply chains. Directionally, this quarter would also provide more clarity on real impact of GST as well efficiency gains to be expected.
What are the key triggers for the markets that one should watch out for in the coming year?
We have seen solid inflows into mutual funds as investors adjusted their asset allocations across various asset classes. Domestic inflows, changes in political situation are key variables to be tracked for next few quarters. Improvement in earning can be expected from (a) banking system which should see reduced pressures due to improvement in asset quality and (b) efficiency gains in other sectors. Efforts to resolve NPL issues will provide reset to capital structures; it is likely to be precursor for the long term growth of various sectors. We expect private capex to see renewal, similar to what we are experiencing in refining and fertiliser sector. Steel sector is expected to see revival as profitability improves on account of cyclical recovery.
Has time come for investors to look at passive investing or you believe one can still get more returns by investing actively?
Recently, we have started hearing a lot about the index funds, but the first index fund was set up in 1975 by John C. Bogle under the Vanguard group. Over the course of time, passive investment will beat out some, but not all active management. People will always seek superior returns. The point of active management is to beat a benchmark on an annualised basis over the course of an investment cycle and not just mimic the benchmark. A fund manager need not beat the benchmark every year, but should beat the benchmark on an annualised basis over an investment cycle. A majority of managers who underperform their benchmarks regularly over the course of an investment cycle do not have the majority of investor's sticky assets and the fund managers who are better performing are holding the majority of the investor’s sticky assets. As a result, sophisticated investors who are sticking with their assets with the managers are getting rewarded for risks of active management.
Which sectors you believe will outperform in the coming year?
Many sectors are due for revival in upcoming year: (a) banking sector should revive in coming four quarters due to improvement in their asset quality (b) IT should see revival from improved demand outlook and stable currency (c) infrastructure may see uptick due to renewed focus from government. It should see recovery led by investment in road sector and transmission investment. Infra investment should help ancillary investment also.
Sectors like pharma, IT provide valuation comfort, hence change in direction of these sectors should result in significant performance from the returns perspective.
How do you analyse the geopolitical situation around the world and its impact on Indian equities?
We follow bottom-up strategy in portfolio construction. We hence consider these risks at each and every investment level – our each investment thesis is vetted for these risks before we take position in that investment. Intuitively for us, it makes a lot of sense as these risks have dissimilar repercussions on various businesses.
Going forward, we perceive escalated geopolitical risks for the market. Tensions are seen at multiple national and international levels. We are quite positive of the Indian story from a 3-5 year perspective as we believe any geopolitical risk would have a medium term impact. However, the long term story should remain intact. Investors however need to be forewarned about contagion nature of such events. Investors need to be prepared for increased gyrations in asset prices and heightened uncertainties for a length of time.