Maintain 30% allocation in mid-caps: Mirae Asset Mutual Fund CIO

Mid-caps are now at a good discount to the Nifty, as well as their historic long-term averages, says CIO Neelesh Surana

Mid-caps are at a good discount to the Nifty, and their historic long-term averages, says Neelesh Surana, chief investment officer (CIO), Mirae Asset Mutual Fund. In an interview to Ashley Coutinho, he says investors can maintain an allocation of 25-30 per cent in mid-cap funds. Edited excerpts:

What is your outlook for the market for the year ahead? 

Short-term volatility is driven by event-based noises and is difficult to predict. The fundamental of India’s long-term structural growth drivers are intact. Also, broader market valuations are reasonable across size, quality, and sectoral parameters. At a forward PE multiple of 19x, the markets are still within boundaries of reasonable valuations. The denominator ‘earnings’ is low compared to long-term averages, given that the profit after tax (PAT) to GDP ratio is at 3 per cent, which is a 15-year low. Overall, outlook for the market remains positive for investors with a long-term horizon.

Do markets look overvalued? 

We do not believe that the markets are overvalued, particularly mid-caps. Mid-caps are now at a good discount to the Nifty, as well as their historic long-term averages. We would advise investors to maintain an appropriate allocation, say at 25-30 per cent in mid-cap funds.

What bearing will the elections have on the markets?

The current elections are in an economic backdrop under which earnings are depressed, and thus would recover, irrespective of the outcome. Hence, we do not expect a sharp and sustainable downside. Overall, the macro economy construct is balanced and there is some scope for monetary stimulus, although the fiscal situation does pose some challenges. Many pockets of the economy are yet to mean revert to their long-term potential. For example, the profitability in corporate banks and capex-related businesses are much lower than the long-term potential.

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

The industry has a two, two-and-a-half decade track record of generating alpha, which got impaired over the last two years. The investors have matured and are willing to give a long rope to fund managers, understanding that the last couple of years were an aberration to an otherwise solid long-term alpha creation. The unusual concentration in the benchmark constituents is partly responsible for this divergence. We believe that India should remain a good alpha generating market, given that it is still a fast growing economy and offers differentiated returns. 

How is India placed among emerging markets (EMs)? 

Emerging market correction in the past year was linked to interest rates in the US and China, and the reversal was similarly linked to the change in stance, which is now more dovish. Additionally, trade sensitive EMs (India is relatively not) have issues surrounding the ongoing trade tussle between the US and China. Within EMs, India will continue to remain an outlier economy with superior growth prospects over the next decade, given its favourable demographics. Additionally, India is defensive, given less sensitivity to global events like trade conflicts.

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

We don’t see equity MF flows tapering as the investor ecosystem has matured with allocation getting committed for the long-term, which invariably generates a good experience. A case in point is the sticky SIP flows, wherein the time frame for investment is 5-10 years. Also, the fact is, equity funds are under penetrated as they account for only 4 per cent of GDP.  

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

Near term robust earnings are primarily driven by feeble base in banking. Overall, PAT to GDP ratio is at a 15-year low, and will improve over the next three years, driven by mean revision in banks, real estate, private capex, telecom, automobile and healthcare. The possible roadblock at the macro level is the not-so-comfortable fiscal situation, which the new government will have to deal with while continuing with investments.

Which sectors are you betting on? 

We are positive on private banks, both retail and corporate lenders, insurance, autos, healthcare, gas-utilities, and building materials, particularly where share of the unorganised sector is large. In addition, we have added few value public sector enterprises, given that valuation disparity has widened considerably, with investors eschewing cyclicals while chasing certainty and growth. We are underweight on non-banking financial companies (NBFCs), consumer staples (due to valuations), and the construction sector.