SIP strategy for retail investors: UTI MF manager explains when to increase allocation

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Updated: Aug 09, 2019 12:54 PM

At the current Nifty level of 11000, market is quoting at 17 times one year forward earnings which is slightly higher than the average valuations of the last 5 years, he says.

At a Nifty level of 11000, market is quoting at 17 times one year forward earnings which is slightly higher than the average valuations of the last 5 years.

The stock market remains under pressure given a confluence of domestic and global factors. Global economic slowdown, declining global yields, fiscal issues and geopolitical tensions are among the various challenges faced by investors, says Sanjay Dongre of UTI AMC. At the current Nifty level of 11000, market is quoting at 17 times one year forward earnings which is slightly higher than the average valuations of the last 5 years, he says. Sushruth Sunder of Financial Express Online recently interviewed Sanjay Dongre, Executive Vice President & Sr. Fund Manager, UTI AMC, who shares his outlook on the stock market, his assessment of the Q1 earnings so far, equity mutual fund inflows and SIP strategy for retail investors. Here are edited excerpts-

What is your near-term outlook on stock market?

Following challenges are faced by the Indian markets in the short term.

  1. Global economic growth is slowing down as the trade war between US and China coupled with the waning impact of fiscal stimulus in the US economy is leading of lower growth in the US economy
  2. Growth concerns are weighing down the central banks across the globe rather than inflation concern leading to dovish outlook by the central banks. Yields are coming down across the markets
  3. Fiscal difficulties faced by the Indian economy
  4. Geopolitical tensions may lead to volatility in the crude oil prices. This in turn may impact the currency
  5. Indian economy is facing a soft patch with slowdown in the consumption

The earnings growth is critical to sustain the valuations for sectors/stocks. Microeconomic environment in the economy has turned benign. Expectation of lower inflation, lower interest rates, lower current account deficit and lower fiscal deficit may lead to better and sustainable earnings growth in the medium term. Nifty earnings growth is expected to be in high teens in FY20 and low teens in FY21. Part is earnings growth can be attributed to base effects of past year. Most of the growth is expected to come from domestic oriented sectors like cement, construction, engineering, financials etc. The normalization of earnings may also happen in PSU Banks and corporate oriented private sector banks.

Also read: TCS could have listed during 2001 IT boom but Ratan Tata said ‘no’; a must-read for all shareholders

At a Nifty level of 11000, market is quoting at 17 times one year forward earnings which is slightly higher than the average valuations of the last 5 years. Hence market is neither cheap nor expensive. The market may sustain current valuations for some period on account of declining yields in the financial markets and benign microeconomic environment.

 In your assessment, how has the Q1 earnings season been? Which sectors are likely to see robust earnings growth going forward?

Till now, the reported earnings for 1QFY20 has been below the market expectations. Slowdown the consumption and in the broad economy is clearly reflected in the earnings reported so far. Auto sector continues to face challenging environment with companies reporting decline in the volumes and higher inventory in the supply chain. Deal wins and pipelines in the IT sector remains encouraging while margins pressures are clearly visible in the quarterly earnings. Though the volume growth reported by the consumer companies have been stable, their commentary for future demand indicates weakness particularly on account of stress emerging in the rural economy. Private Banks results indicates moderation in the corporate loan growth. But the retail growth continues to remain strong. Asset quality trends have been mixed with credit cost continues to remain high.

Equity mutual fund inflows have come in at a fresh 7-month high. Is this trend likely to continue?

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 is big drop in the market and market used to quote at lower than average valuations. 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 realized the fact that the equity as an assets class gives higher return than any other asset class in the long term. Indian retail investor has truly understood the Warren Buffets 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 best thing that has happened to the Indian stock market in the last three years. We may witness sustained inflows from Indian investors.

What factors should investors consider before investing via SIPs?

As equity assets class have far higher volatility compared to other asset classes, best way to even out such volatility is to invest through SIP (Systematic investment Plan). Investors should not decide on the asset class / fund category by chasing the historical returns. Depending upon the risk appetite, investor should allocate 75-100% of equity investment to diversified equity funds and 0-25% to midcap/thematic/sector funds. Also the investors should increase their allocations to SIP whenever the market is quoting at a valuations lower than the average valuations of last 10 years.

(Mr Sanjay Dongre is Executive Vice President & Sr. Fund Manager at UTI AMC. The views expressed are his own)

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