The less severe economic impact of the second wave of covid-19, policy measures and reforms such as PLI and GST are keeping equity inflows buoyant, said Swati Kulkarni – Executive Vice President and Fund Manager – Equity, UTI AMC in an interview with Kshitij Bhargava of Financial Express Online. The market veteran added that going ahead investors need a well-diversified portfolio to eliminate sectoral risks while adding that IT, Auto, and healthcare could do well. Swati Kulkarni also highlights the potential of the banking sector in a reviving economy. Here are the edited excerpts.
- Domestic markets have hit fresh highs in recent weeks, what is keeping investors buoyant?
Globally, the accommodative fiscal and monetary policies as a response to deal with the pandemic induced economic disruption, have resulted in easy liquidity and a low-interest rate regime. Central banks have been guiding for sustaining this stance and support growth as they believe that the current inflationary pressure is transient and as the supplies normalize it should cool off. Equity investors typically have long investment horizon and value businesses in perpetuity by discounting the expected future cash flows to the businesses. Thus, equity investors look beyond the pandemic for normalization in demand growth and cash flows.
FY21, EPS of Nifty 50 Index grew by 11% despite degrowth in Indian GDP, as the companies benefited from market share gain as well as cost savings and margin improvements. Increased penetration of vaccination could further improve the ability to deal with this pandemic leading to less economic disruption. Notwithstanding the humanitarian stress, wave 2 has been less damaging to the economy than wave 1. Also, the policy measures and reforms announced in the last few years like GST, lower tax rates for new manufacturing, PLI are expected to attract investments and improve the organized sector share in the economy over the long term. All of these could have been reflected in buoyant flows in equity assets.
- What sectors do you believe are best placed for investors to invest in while the index charts its path towards 18,000?
I believe investing in a well-diversified portfolio for the long term is always a better option for the retail investors to handle the risks associated with equity investing e.g. concentrated investment in a few sectors exposes to sector-specific risks and volatility is high if the investment horizon is short. Also, to earn decent returns from investing in the sectors it is not enough to enter at an opportune time but also to exit at right time, which may not be practical.
Having said this, the IT sector has a good revenue growth visibility for the near term as reflected in the large deal wins most companies have reported, but valuations are rich. The automobile sector was struggling for growth even before the pandemic as auto loans slowed while the insurance and emission norms increased the cost of ownership. There is an expectation of revival of demand though the timing cannot be forecasted. With the looming disruption risk of EV, one needs to be selective. The banking sector has divergent plays. Select banks with strong fundamentals like decent ROA, capital adequacy and well provided doubtful assets are better equipped to benefit from the impending credit growth with normalization of economy and gain market share. Whereas, a few other banks with lower capital cushion and weak ROA may be at risk of lower growth even though valuations may appear cheap. The Healthcare sector is likely to do well based on domestic market growth and opportunities in developed markets for complex generics and specialty formulations.
- Midcap and small-cap indices have again started moving higher after underperforming for a few weeks, what is your outlook for them?
Valuation comfort across the market capitalization segment is low. Typically, the rally pushes up the prices of all and sundry stocks, it is extremely important to separate the likely winners from the potential value destructors. Among the midcap and small-cap, there are well-managed companies with consistent cash flow generation, focus on profitability and long growth runway, such companies even if they correct in the short term, have the potential to create value in the long term.
- The markets have been rallying strongly for 15-16 months now, where do you think we are placed in this market cycle, is a correction coming soon?
Our portfolio strategies are agnostic to market levels, rather they are guided by the investment mandate and we do not take any cash call. The low valuation support makes the markets vulnerable to any shock that may affect investor sentiment. However, low interest costs and operating leverage benefits with demand normalization could lead to earnings growth which could sustain of higher valuations. So, it may be futile to predict correction timing or its magnitude. Our focus is on stock selection to stay invested in long term value creators, in fact, correction could be an opportunity to add.
- What sectors are you overweight in your UTI Mastershare fund?
UTI Mastershare is overweight in Pharmaceuticals & Healthcare, Telecom, Consumer Services, Industrial Manufacturing, Automobile and IT sectors.
- What are your views on valuations at this juncture?
Valuations both in terms of the Price to Earnings as well as Price to Book multiple are above 1 standard deviation from the last 10 years average, indicating that they are in the expensive zone when compared to historic levels.