Corporate Profit to GDP ratio which typically is in the range of 5% is currently slightly around 2.5% indicating that we are at the cyclical bottom as far as earnings is concerned.
Almost a year-and-a-half back, after the outbreak of the Covid-19 pandemic, there was pessimism all over the stock market and the stock prices of several top companies fell to record lows. The leading indices Nifty 50 and Sensex kept falling and the pessimism was all over the broad market. And, then came the big rebound on the back of global recovery in equity prices – all thanks to the US Fed infusing stimulus to keep the economic engines running.
From the lows of March 2020, recorded on March 24, when the Nifty 50 touched a low of 7511.10 levels, the index has moved up almost 10000 points – a gain of almost 133 per cent over this period. Nifty 50 is trading at around 17350 on Monday 6th September 2021, shy of 150 points from clocking a 10000 points rally in under 18 months.
But, is it the top or the markets will move higher? For those who have their goals nearing in the next 3-5 years, they should start the de-risking process by shifting funds from equities to less volatile debt funds. But, for many others, there is also the FOMO – fear-of-missing-out factor at play and deploying fresh funds at these levels may not be comfortable with all investors. Aditya Khemani, Fund Manager, Motilal Oswal AMC, in an email interview with FE Online, clears the air and shows investors the way forward. Excerpts:
How should existing investors of equity mutual funds approach the market now?
Equity markets are ultimately a reflection of the economy and in case the economy does well the markets will do well. Last 4-5 years there has been lot of speed breakers in the economy starting with demonetization, IL&FS credit crisis, short term impact of GST implementation and finally Covid and it is now reasonable to expect the worst is over and the growth in the coming years to some extent should make up for the lost ground.
Hence, it looks like we are the start of a strong earnings period for corporate India. Corporate Profit to GDP ratio which typically is in the range of 5% is currently slightly around 2.5% indicating that we are at the cyclical bottom as far as earnings is concerned.
As one sees strong corporate earnings growth going forward the markets should also do well. Though market returns should be less than earnings growth as some part of higher earnings growth the market has already factored into its valuation.
So an existing investor should just stay invested without getting bothered about day to day volatility.
What should new investors or those waiting on the sidelines for the market to crash do now?
It is natural for someone who wants to put money into the market to get scared when one sees the market movement from the bottoms of last year. But my request to them would be to see the data in a different way.
Over the last 3 years, Nifty is up 46%, BSE Midcap Index is up 41%, BSE Smallcap Index is up 56%. And if you annualize these it ranges from 13-16% annualised returns which seems much saner to a human mind.
Going ahead, as I mentioned earlier, it looks like we are at the start of a multiyear strong earnings cycle hence the market should do well in times to come though there will be bouts of volatility as sentiment plays a big part in short term market movement.
So one should not waste our previous energy/effort in something which is beyond our control. Stay fixated on your financial goals and take measures to reach there.
Investors of equity funds often tend to drift between the large-cap and mid-cap segment of the market. How should one position their portfolio?
Should I invest in large caps or should I invest in mid- caps is the biggest question. Usually it is very difficult to catch the cycle as to which will do better and most professionals also fail at this. In our analysis we have come to a conclusion that 50:50 allocation towards large and midcaps could be an optimum allocation for a long term investor. Hence an investor could position their portfolios accordingly.
What has Motilal Oswal Large and midcap fund to offer for the investors when the markets are at an all time highs?
Motilal Oswal Large & Midcap Fund we believe has a lot of differentiators. One we try to keep the allocation between large and mid/small caps at 50:50 and this allocation has maximised return in the long term keeping the risk in check as the large cap offers stability and the mid/small caps offer higher growth.
Secondly, the tagline of the fund is “Today’s and Tomorrow’s Leader in One Fund”. We believe in most sectors the industry is consolidating hence the leaders are becoming stronger and taking market share from the weaker ones.
So, 50% allocation has been made to companies who are No 1 in their sector and 87% allocation is made to companies who are within Top 5 in their sector. Hence we believe a portfolio having a large allocation to leaders is an unique proposition.
Thirdly, in line with our view of strong economic growth over the next 2-3 years we have a higher tilt towards economic recovery plays by having around 70% allocation to this and we are playing this through various themes like banking sector, industrial sector, real estate eco system, consumer discretion, etc. So overall it is true to label a multi-cap portfolio, having bottom up allocation to companies who are leaders in their segment.