Equity market slave to earnings, not flows: Vetri Subramanian

Sustained buying by MFs has provided a counterbalance to FPI selling, cushioning the market fall. While the record inflows at equity MFs have reduced the vulnerability of Indian equities to overseas hot money, it has created a problem of plenty as valuations remain lofty and earnings growth has failed to catch up. That hasn’t dampened the optimism of domestic fund managers, who remain bullish about India’s long-term growth prospects. They single out equities as the preferred asset class. Here are the views of top four fund managers on the opportunities and the weak spots for the markets. Edited excerpts:  

Manish Gunwani

CIO–equity, 

Reliance Mutual Fund

On market outlook:
 

The short-term outlook is mixed, given the tailwinds of healthy liquidity both on the domestic and global side, a reasonable pick-up in global growth and India’s macro-stability countered by high valuations on near-term earningsa, low growth due to one-off factors like the GST (goods and services tax) and considerable supply of paper in the next few months. Over the next two-three years, we expect the market to track earnings which is likely to be healthy, given the low base created in the past three-four years.

On the difficulty in stock-picking:
 

While the headline indices have not gone up too much in the past three years, the broader market has done much better, and the valuation gap between large- and mid-caps is much less than the historical experience. Market valuations are stiff on near-term earnings. However, the mitigating factor is that both the domestic and global business cycles are coming off a low base. Also, a large part of the market move has been driven by stocks of high-quality companies. For value investors looking at reversion to mean trends, valuations in a lot of other segments are quite reasonable. Currently, we find value in select financials, pharma and logistics.

Vetri Subramanian

Head–equity, UTI AMC

On valuations: 

Aggregate market valuations are a concern and there are only limited pockets of value. We have seen a near doubling of broader indices like the BSE 200 over the past four years. This has been driven predominantly by valuations being re-rated higher. Earnings have played a minor role, growing in low single digits (CAGR) over this period. Forward return expectations will have to be muted, given the current level of valuations. The burden is now on the earnings growth to do the heavy lifting. While domestic investors are coming forward, over the longer term, equity market outcomes are slaves to earnings, not to “flows”. 

Advice to investors: 

In the long term, equities should be the preferred asset class for wealth creation. Investors who are underexposed to equity, an SIP (systematic investment plan) or a medium-term systematic transfer plan are the best way to gradually raise their equity allocation. Every individual needs a financial plan and underlying that should be an asset allocation method that would incorporate valuations among other considerations. 

Anand Shah

Deputy CEO & head–investments, 

BNP Paribas Asset Management

On long-term outlook: 

An enhanced government spending in infrastructure, irrigation and towards farm loan waivers will provide the much-needed growth to GDP (gross domestic product) and thus, to earnings in the coming two years. As the economy picks up after the short-term impact of demonetisation and the GST, we will have more stock-picking opportunities than before. Over the next 12 months, macro factors such as financialisation of savings, formalisation of economy and fiscal spending by the government as well as micro factors such as corporate deleveraging will spur companies’ earnings to grow faster than GDP growth. That said, we are mindful of high valuations and are evaluating companies with far more rigour than before. We like businesses exposed to discretionary spending in urban India, rural consumption, fiscal spending, defence spends, retail liabilities and retail loans.

On continuity of domestic flows: 

An increased allocation of household savings towards financial assets is structural due to inflation targeting by the central bank. Increased allocation to equities within overall financial savings will be determined by relative valuations of equity versus other competing financial instruments delivering fixed income returns. As and when markets correct, we will see an increase in domestic inflows in equities. If markets continue to rise, we will see more allocation towards balanced funds or fixed income funds.  

Jinesh Gopani

Head–equities, 

Axis Mutual Fund

On key triggers for the market:

The markets may be range-bound in the near term, with a possibility of a two-three per cent correction. Overall macro numbers seem a little weak, valuations are high and the quarterly earnings numbers may disappoint. So barring the liquidity factor, things don’t look that great. In the long term, upcoming state elections may give a clue to the current government’s popularity. The US Fed’s plans to gradually unwind its quantitative easing programme may suck out some of the liquidity sloshing around. So, net-net Indian equities may have to brace for some volatility. 

On sector picks: 

A correction of 15-20 per cent in stocks where earnings growth is not visible and which have run-up solely on the hopes of an earnings uptick cannot be ruled out. We are bullish on select private banks, NBFCs (non-banking financial companies), housing finance companies, auto and auto ancillaries. The technology and pharma sectors can be looked into, given the recent slowness in the domestic economy and a possibility of the rupee depreciating further. Value investors can stay on the sidelines or wait till more clarity on implementation of the GST emerges.