We may not see a repeat of high returns that we experienced in the last 3 years: UTI MF

Indian retail investors have truly understood the Warren Buffet's principal “be fearful when others are greedy and be greedy when others are fearful’, Sanjay Ramdas Dongre, EVP & Sr. Fund Manager, UTI Mutual Fund, said in an interview with Moneycontrol’s Kshitij Anand.

Q. What is your first take on the budget announcement? Which sectors would benefit and which would be hampered post the latest budget announcement?

A. The interim Finance Minister presented the Union Budget 2019-20 catering to growing concerns (agri sector and middle class) ahead of an election mandate. The Budget missed its fiscal targets for both years announcing a fiscal deficit to GDP at 3.4 percent in FY19 and FY20.

The Budget encompasses several big-bang announcements with respect to direct farm income transfer and tax exemptions for the middle class thereby giving a flip to the consumption in the economy. Incrementally, the budget has positive for the consumer durable and consumer non-durable goods sector.

Q. FIIs were net sellers last year but we saw record inflows via mutual fund route. Do you think the trend will continue in 2019 as well?

A. Historically, the retail investor used to get excited when the market had rallied to higher levels of valuations and used to shun the market whenever there was a big drop in the market.

Now, the Indian retail investor has achieved a sense of maturity after witnessing rise and fall in the market in the last 20 years. Indian retail investor has realised the fact that the equity as an assets class gives a higher return than any other asset class in the long term.

Indian retail investors have truly understood the Warren Buffet's principal “be fearful when others are greedy and be greedy when others are fearful’.

Hence the surge of inflow from the retail investors even in the weak market is the best thing that has happened to the Indian stock market in the last three years. We may witness sustained inflows from Indian investors.

Q. The Sensex has grown like 100x in 32 years, at 15 percent CAGR. Do you think, 2019 will also give us a similar opportunity to enter and remain invested for a long time to create wealth?

A. India being a developing country is bound to have its growth rate much higher than that of developed countries. Growth along will create a lot of wealth creation opportunities for the investors over a long term.

However, today the market valuations are higher compared to that prevailing 32 years back. Hence the investor’s expectation about the future long term return needs to be moderated down.

Q. What is your call on small and midcaps for 2019?

A. The Nifty is quoting at 17 times one-year forward multiple. Despite the correction in the last three months, mid/smallcaps are quoting at a premium valuation compared to largecaps.

The real serious money is made when these small and mid-cap stocks start quoting at a discount to the largecaps. Hence the mid/small cap segment is expected to exhibit the performance similar to a large-cap segment from current market levels.

Q. Looking at how markets behaved post the Budget, what is your outlook for Indian markets for the rest of the year?

A. At the level of 10,600 for Nifty which we hit just last week, the market was quoting at 17 times one-year forward earnings which are slightly higher than the average valuations of the last 10 years. To that extent, valuations are not cheap.

Therefore, our expectations of return from the market should be on the lower side. We may not be able to see a repeat of high returns that we experienced in the last three years.

The earnings growth is critical for the market to sustain higher valuations for sectors/stocks. Hence, one should remain invested/overweight in the sector or stocks where the earnings growth is likely to be high in the next two years and remain underweight in the sector or stocks where earnings growth is likely to be less than market earnings growth.

Macroeconomic environment in our country is undergoing through a change. Today, interest rates are 100 bps higher than what they were prevailing a year back.

The Current Account Deficit (CAD) is almost 1.6 percent. The benign economic environment that we have been seeing in the last three years is not going to remain benign anymore.

Therefore, news flow on the various economic indicators may impart volatility in the market place. On the other hand, the probability of earnings being in double-digit is going to be higher after three years of subdued earnings growth.

We expect normalization of earnings in some sectors like banking. So, on one hand, you have a macroeconomic environment which is no longer benign, and on the other hand earnings growth that was lacking in the market is picking up.

Addition to it would be noise levels around general election period. Hence, the volatility is likely to be higher in CY19 compared to what we have seen in the last three years.

Q. IMF recently highlighted growth concerns for the global economy. Is this something which investors should be worried about?

A. The global growth slowdown is most probably the outcome for CY19. As the impact of fiscal stimulus fades way in the US, its growth is likely to slow down and experts are pointing that the US economy may exit CY19 with the growth of less than 2 percent in the December quarter.

US-China trade wars are likely to impact the Chinese GDP growth. EU region may also register lower growth.

Q. If the globe is slowing down, do you think India will be able to pull it off with ease amid the possibility of a political drama which could unfold in the first half of 2019?

A. In the medium to long-term horizon, the markets always slave to the earnings. Factors such as earnings growth, return on capital employed, positive cash flow generation impact the market positively or negatively. Events such as elections impart volatility to the markets in the short term.