Elevated credit spreads not good for growth: UTI AMC's Vetri Subramaniam

The entire pharmaceutical sector has witnessed a significant correction and this is visible in the valuations, says UTI AMC's Subramaniam

Vetri Subramaniam, group president & head (equity), UTI Asset Management Company, in an interview with Hamsini Karthik, says the borrowing plan announced in the Budget may strain resources. Edited excerpts:

What’s your key takeaway from the Interim Budget?

The size of the borrowing programme and growing reliance on extra budgetary resources is putting a strain on resources. Also, credit spreads remain elevated. This is not good for growth and raises a concern about “crowding out”.

How do you see 2019 pan out for investors, given where rupee trades at and the overhang of general elections?

These variables have a role in determining the performance of the equity market this year. But the real question is whether this year’s market outcome is relevant to the large number of people investing through systematic investment plans (SIPs) based on their longer-term financial goals? To my mind the indicator that works better than most others in determining medium-term outcomes is valuation. On that count, the valuations have corrected from expensive territory to the upper reaches of fair value. It is not cheap and is still well above the long-term average. It is also not very cheap in comparison to bonds. Valuations are not like a school bell that causes an immediate reaction among students in a school, but they do create a drag on medium-term outcomes. 

Which sectors have corrected significantly and seem attractive?

The entire pharmaceutical sector has witnessed a significant correction and this is visible in the valuations. This is an area of opportunity. Valuations in commodities and utilities also look more reasonable after their weak performance. In automobiles also there has been a de-rating. As regards market capitalisation, the premium that mid caps had to large caps has eroded. Historically mid caps have traded at a discount to large caps. We are not there as yet, but, bottom up, we see a lot more opportunities here after last year’s damage which was more acute as you move down the market cap curve.

What’s your view of the mid- and small-cap stocks. Do you perceive the worst is over for these stocks? 

We do think that the worst of the correction is now behind us. That is why we are now much more open to look at opportunities in the space based on their merit. The top-down view to avoid mid caps because of a valuation premium no longer exists. We believe that in mid-cap companies bottom-up stock selection is more important than sector selection in creating alpha over the long term. This is what the long-term data indicates. The sector allocation in our mid-cap fund is an outcome of the stock selection. There is disproportionate attention paid to the rewards that are to be had when mid-cap companies scale up in size but not enough attention paid to the risk of many mid caps never achieving escape velocity and getting buffeted by business cycles.

December-quarter earnings season hasn’t lived up to expectations…

At the beginning of FY19 the consensus estimate was for Nifty earnings to grow by over 24 per cent. Now, that expectation has been cut to the mid-teens. For FY20 Nifty consensus earnings estimates are above 21 per cent, but this is driven by a handful of index heavyweights and is not broad-based. We don’t focus on quarterly earnings surprises, because they can be volatile and not very indicative of longer-term earnings potential.

While overall equity AUM (assets under management) growth is strong, growth rates are coming off a bit. Does this worry you and how do you see flows panning out for 2019?

The SIP flows are continuing and we are witnessing new sign-ups. We believe structural trends will favour increased flows into financial assets and mutual funds. But, that does not mean cyclical forces will be entirely absent.