After providing spectacular returns in 2018, markets have been volatile and flat due to global and domestic factors. V Srivatsa, Fund Manager and Executive Vice-President, UTI Asset Management Company, expects markets to trend down or be flat with a negative bias. Given the current scenario, Srivatsa likes sectors such as information technology, pharmaceuticals, regulated utilities (power generation) and realty. Excerpts:
After a spectacular return in 2017, markets are flat in 2018 till date. Your view for the whole year ...
There are various factors of flat market in 2018 till date. Sentiment in equity has come down a little bit due to imposition of long-term capital gains tax in the Budget. Global volatility has also increased in the last couple of months primarily due to rising US treasury rates. General sentiment is that bond rate across geographies are likely to go up. So, the days of ultra low interest rates are over.
Latest news flows on the trade wars is further dampening the global sentiment and impacting emerging markets including India. Domestic macroeconomic scenario has also deteriorated in the last two three months.
However, last two-three month correction is a healthy one because markets were purely in overvalued zone. I think next three four months will give more buying opportunities. In the immediate term, I see markets trending down or at least they will be flat with a negative bias.
FIIs are selling since budget both in equity and debt market. Do you think MFs will again make up for their selling this year? Can you throw some numbers on inflows?
The trend for us is that inflows are still coming but the pace has slowed down substantially. However one should also note that last four to five months of huge inflows into mutual funds were an aberration. Out of the total inflows of roughly ₹18,000-20,000 crore, part of the flow (say ₹4,000-5,000 crore) was hot money (due to tax differential and no dividend tax). So the realistic and sustainable inflow is ₹10,000-12,000 crore, which is still very healthy inflow. I see this continuing due to lack of other investment avenues for Indian investors.
What is your view on mid- and small-cap? Do you think they will be more prone to correction if markets correct or they will correct less from hereon?
The answer to the question “will they correct more or less” is like this: When liquidity/market sentiment is down, mid and small caps typically tend to underperform. So that trend will continue.
Overall, mid and small cap indices are trading at a premium to the large caps. But this is because of two factors. Firstly, some stocks mainly from sectors like retail or home building are trading at upper end of the valuation. You also have lot of PSU midcap banks which showed losses thus artificially inflating es the PE. But the rest are trading at a reasonable discount to large caps and are quite favourably poised.
What sectors you think have favourable risk-reward ratio and what sectors you think are unworthily pricey?
Information technology and pharmaceutical sectors are good value bets and their fundamentals are also improving. I also like regulated utilities (power generation companies). as I believe demand will witness revival in the next 3-4 years as India’s gross domestic product trends up and in turn industrial growth picks up thus leading to improved utilisation and higher operating leverage. Valuations are very reasonable both in terms of price to book or price to earnings.
I am also positive on realty sector. Post RERA and demonetisation, I see huge amount of supply shrinking and lot of unorganised players moving out of the market. Stock prices ran up but that happened from a very low base of demonetisation. From longer term perspective, they still look very attractive.
Your comments on corporate performance in Q3? Are your happy overall? Any surprise or disappointments?
Corporate performance was good overall but one has to also note that December 2017 quarter had a big base effect (demonetisation in same quarter last year). Hence sector linked to consumption like automobile, FMCG or even domestic pharma have seen the benefit of the same. A big and positive surprise came from the IT sector due to improved sentiment in the end market with IT budget picking up
What is the earnings outlook for FY19?
Last couple of years something or the other has been happening (demonestisation in FY17, GST in FY18). So we have had low base or almost no earnings growth in last three four years. The base is behind us now. There is nothing on the anvil, which stops us from saying that we will not have mid-teen earnings growth. It could be higher also
Thus I expect 15 per cent earnings growth for benchmark index provided no big and disrupting event happens next year. We expect both domestic consumption and investment (big focus on infrastructure) to do well.
What is your view on the banking sector?
I prefer private sector banks and within that corporate oriented private banks. I find their valuations reasonable. Public sector banks are a clear avoid to serious investors in the current scenario though they could be good trading bets.
Which category of fund would you recommend to investors currently? Why?
I would be dynamic asset allocation fund. It will do very well in a dynamic environment and huge volatilityy. It has not done as well in the last one year because the key success factor is high volatility. In our case it is called wealth builder fund. We are currently around 45 per cent net equity. We have been able to ride volatility because we have been low equity till now. If markets go down further we would be able to put more equity gradually as the market goes down and ensure the best for the investors