Full-fledged earnings recovery is still some quarters away: Jinesh Gopani

With the elections drawing to a close, market uncertainty has gone away, says Gopani

While the election results are positive for Indian equities, long-term structural changes will take time, says Jinesh Gopani, head of equity, Axis Mutual Fund. In an interview with Ashley Coutinho, he says that a full-fledged earnings recovery is still two-three quarters away and is closely linked to macro factors. Edited excerpts:

What do you make of the election results? 

Markets have been volatile in the build up to the national elections over the past few months. With the elections drawing to a close, market uncertainty has gone away. The Narendra Modi government had initiated several structural reforms, including the bankruptcy code and the goods and services tax (GST). The change in policies will take time to institutionalise and will have a material impact on the economy in a phased manner over five to seven years. Such policy action was possible due to a strong mandate given in 2014. With the Modi government’s return to power, the markets expect round two of political and economic reforms. We believe these reforms will be stepping stones to stronger and a more sustainable economic growth that balances the benefits between the social sector and the private sector.

What is your outlook for the markets?

The election results are extremely positive for the Indian markets. However, long-term structural changes will take time and hence investors should continue to exercise caution while deploying fresh funds at this juncture. Earnings recovery is still a couple of quarters away and hence participation in a phased manner would be ideal to ride out the inherent volatility in the current market.

What are the themes that you are looking at?

Given our focus on quality and bias towards fundamentally sound business models, the big trend we are looking to play is the corporate deleveraging and operational efficiency story that is unravelling. Our investment philosophy has always looked to capture earnings-driven growth over large-time periods. This has worked well for us and our portfolios are testament to this philosophy.

Do the Indian markets look overvalued at this stage? 

Earnings have been impacted to some extent as the economy adjusted to structural changes. New regulations around taxations and environmental policy coupled with issues surrounding a few NBFC lenders over the last six to eight months have had some bearing on cyclical stories. This, in our opinion, is a short-term phenomenon and growth in such sectors is likely to return in the medium term. Markets have created a clear distinction between fundamentally-sound companies and the rest. The group of quality companies with strong management, strong fundamentals and consistent earnings growth continue to attract investor interest given their proven track records. From a valuations standpoint, markets look expensive as earnings are depressed. Sectors like banking and financial services saw earnings impacted due to NPA provisioning and concerns over liquidity in the system. This affected growth and consumer sentiment, again a short term phenomenon. 

Do you see a sustained recovery in corporate earnings in the coming quarters? 

The improving macro environment has had some impact on corporate earnings. However, a full-fledged earnings recovery is still two-three quarters away and is closely linked to macro factors. A global shock to the economy from high crude prices or a fallout of the US-China trade talks could have a bearing on earnings recovery.

How difficult has it become for fund managers to generate alpha? 

The last 12-18 months have seen the emergence of what we call ‘narrow markets’, wherein frontline indices do not reflect the true performance of the market. In such a situation, a handful of index stocks drives the markets upwards given the weight in the index while the broader market sees material dispersion in performance. Funds that have been underweight in these stocks have underperformed the large-cap benchmarks. Lacklustre performance of stocks in the broader universe has hampered performance of several active fund managers. This has started to normalise since March 2019. Regulatory changes like scheme categorisation and total return benchmarking are issues that portfolio managers have come to terms with. While investor awareness on issues such as total return analysis and scheme categorisation have made the markets more efficient, improved portfolio strategies and strong research capabilities will continue to drive alpha for fund managers.

Do you see equity MF flows tapering in the coming months? 

Mutual fund flows continue to be healthy despite volatile markets. SIPs continue to remain around the Rs 8,000 crore-mark and this is a good sign. Systematic investment plans (SIPs) money is stickier given the long-term investment horizon of investors and is hence unlikely to see see-saw movements compared to lumpier flows that are generally sentiment driven. 

The MF industry today has become a large market participant.