While the markets have run up significantly post May 2009, it could run some more if investors see action on the reforms front and earnings growth hits the 18-20 per cent mark, believes UTI’s vice president and fund manager, Swati Kulkarni. She is betting on the reforms theme and has parked about a fifth of the Dividend Yield Fund’s Rs 2,000 crore corpus in the energy sector. Justifying her investments she says that the valuations in this sector are quite low. Further, if crude oil prices fall, it would be much easier to pass on the costs, she believes. Two recent events, the government’s decision to increase natural gas prices and the sharp fall in crude oil prices bear out her logic for the investment. While the March quarter results indicate volume growth, what are the drivers that will sustain demand?
Investment demand
“The signs of demand are there and from the market perspective, we need to see investments on the capex side as well.” She believes that once demand is sustained companies will be more open to invest and augment capacity. If this scenario plays out, she expects a 15-20 per cent earnings growth over the next two years. While the EU contagion has had an impact she believes that central governments have moved swiftly to contain it. The worrying factor is the impact on demand in the EU region due to the stiff fiscal targets and the drop in inflows into emerging markets. What lessons does it hold for India? “The importance of achieving fiscal consolidation is even more important for us now when the global liquidity is likely to tighten. I think there will be good amount of progress on policy reforms.”
Sectors in the funds
In addition to energy, Kulkarni is also betting on financials. She believes that non-performing assets wouldn’t be a problem in an environment of an improving economy. That was the one concern which was holding back the investments in this sector, she says. Further, from here on, infrastructure is a theme investors should keep in mind and is likely to do well.
| HITS AND MISSES | |||
| Scheme | Returns (%) * | Benchmark | |
| 1 year | 3 years | ||
| Dividend Yield | 34.4 (22.3) | 18.2 (7.1) | BSE 100 |
| Mastershare | 19.1 (22.3) | 9.1 (7.1) | BSE 100 |
| Tax Saving Plan | 16.7 (21.6) | 4.8 (7.1) | BSE 100 |
| MNC | 40.2 (22.3) | 11.6 (7.1) | CNX MNC |
| *As on June 7, 2010; Figures in brackets are respective category returns Source: Valueresearchonline.com | |||
Pharmaceuticals, too should do well as it is a defensive sector and healthcare spends are moving up. IT is yet another sector that is likely to do well as discretionary spends are moving up. The investments in IT sector worked for her last year, in the midst of a downturn. The sector, she says, had companies which were generating good free cash flow year after year and in a scenario of inflation and interest rates, this is a sector which would be a relative outperformer, she believes.
In addition to this, she also made good money from investments in the engineering and capital goods sector made in 2003 when the valuations were cheap as also in power stocks which benefited the Electricity Bill was passed into law. While these worked she also had her share of disappointments. In 2004-05, it was exposure to consumer stocks which were considered a steady, defensive and non-cyclical and act as a balancing factor in a portfolio. It did not work out as that was a period when growth was the only mantra and cash flows was not that important. The fund manager gets choosy when valuations hit the 18 times forward earnings. She looks at high beta and high growth stocks and checks whether assumptions can stand scrutiny.