He does not factor an interest rate hike in June but expects a minimum 25 basis points increase by December-end.
Given the market volatility, V Srivatsa, Executive Vice President & Fund Manager, UTI Asset Management Company, recommends investors to invest in dynamic category funds. “In this fund, equity allocation is less than 100 percent, so it’s favourable to new investors in the present scenario,” he told Moneycontrol in an exclusive interview.
He does not factor an interest rate hike in June but expects a minimum 25 basis points increase by December-end.
At present, Srivatsa sees value in IT, pharmaceutical and utility plays. He suggests an avoid in private sector banks and consumer stocks
Below is the edited transcript from his exclusive interview with Moneycontrol News’ Hiral Thanawala
Q: How do you evaluate the current equity market? Any headwinds that an investor needs to watch out for?
A: Equity markets will be rangebound with a negative bias. The reason being churning on the global side, where we call risk on-risk off. At present, a lot of money is moving towards safer assets globally. This is on account of interest rates in the US rising due to geopolitical tensions, which will reflect in Indian equity markets too.
Since we are headed into the last year of the Narendra Modi government, with a series of state elections now coming up, we are looking at stability of the government. Any indicators which suggest that the present government may not win the general election or there will be an unstable government next year will see a spike in market volatility.
On the macro front, rising crude prices will have its own implications on inflation. Generally, higher crude oil prices do not auger well for the Indian economy. The biggest positive factor going forward is a pick-up in earning growth.
We have been waiting for earning growth to pick up from the last 3-4 years. There are signs of a pick-up in earning growth in the current year. Also, indicators suggest GDP growth will rise. But the same will be offset by high inflationary expectations as well as resultant current account deficit. High crude oil prices will also have an impact on India’s current account deficit.
Q: Do you expect a rate hike by the Monetary Policy Committee (MPC) when they meet in June for their second bi-monthly policy review?
A: We do not expect a rate hike at their June meet. But in the next six months we see a rate hike of at least 25 bps due to rising inflation. The fact is there are enough signs of a pick up in growth which will lead to higher inflation in the near term.
Q: How do you evaluate midcap stocks underperformance vis-à-vis largecaps in 2018?
A: One needs to take a longer view while investing in midcap stocks. We agree that midcap stocks have underperformed vis-à-vis largecaps this calendar year. But if you look at 3 year and 5 year returns, there was significance outperformance. Since India is a growth market, one would see outperformance from midcap and smallcap baskets in the longer term. There will be periods like this where there will be liquidity issues. The sell-off has been further compounded by reclassification in the midcap category by SEBI norms. Due to the change in norms, there is enough churning in these category of stocks. Lot of these stocks which were earlier classified as midcaps are now fall under the smallcap category as per the new SEBI norms.
Q: Which sectors are worth investing and which ones should investors avoid?
A: At present, IT, pharmaceutical and utilities are the best sectors offering value. While consumer and private sector retail banks are the most expensive. But since they have shown growth in the current environment, investors have just lapped them off.
In the near term, IT, pharmaceutical and utility stocks look a bit shaky and investors are not willing to bet their money there. Whereas they are willing to pay massive premium for growth that is being shown by some sectors. We are underweight on fast moving consumer goods (FMCG) and consumer durable sector stocks. We don’t see earnings growth accelerating in consumer sector stocks.
Q: Your thoughts on a recovery in pharmaceutical and IT sectors. Should investors accumulate stocks in these sectors?
A: The IT sector has largely recovered from its bottom. If you look at one-year forward P/E, they would be significantly outperforming markets. In the pharmaceutical space, valuations are closer to the bottom. Maybe, we will see a 5-10 percent downside from hereon on a very stress test basis. Some part of the pharmaceutical business is still under pressure. When that bottom happens, then those stocks will start recovering. From a longer term perspective, it makes sense to accumulate now.
Q: What led to the underperformance of your schemes compare to peers in the last one year?
A: In the longer term, our schemes have performed well, but in the last one year, performance has been impacted as our strategy itself not did work out well. In the last six months to one year, we saw huge outperformance in the growth or high quality side, wherein we were absent and this impacted our funds’ performance. For instance, we have been overweight on pharmaceutical stocks for the last one year, which has still not performed well. Our funds also have a reasonable investment in mid- and small cap stocks. So, that has also been impacted by the churn as per SEBI regulations. We believe in our philosophy and portfolio so our schemes should pick up from hereon.
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