❝In­vestors need to be pre­pared for in­creased gy­ra­tions in as­set prices❞

- Sar­a­vana Ku­mar, CIO, LIC MF

Dalal Street Investment Journal - - COVER STORY -

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.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.