Market volatility to remain high in 2019: Reliance MF's Manish Gunwani

Fed actions and the trade negotiations between the US and China are key factors that could impact market movement this year, says Manish Gunwani, CIO–equity investments, Reliance Mutual Fund. In an interview with Ashley Coutinho, he says the shift to financial assets from physical assets is structural in nature, and should lead to increased inflows into mutual funds. Edited excerpts:

Last year was volatile for the Indian equity market. What is your outlook for 2019? 

We believe the volatility and correction in mid-caps in 2018 were partially driven by the trend in 2016 and 2017 when both global and Indian markets had a phase of extreme stability. That was an abnormal period as for months we didn't have even 5 per cent correction in our market. The sustained period of ultra-low volatility led to some excesses, particularly in the broader market. Volatility in 2018 in some sense was a catch up for the phase before that. Volatility is likely to remain high in 2019, at least in the first half due to the general elections. The pace of China’s growth and how US-China trade discussions take shape may also impact the markets. Lastly, the world’s largest economy, the US, has had a sustained bull phase and whether growth will peak off now or continue will have a big effect on all major markets. The outcome of these events would determine the near-term market outlook. 

Do Indian markets look overvalued at this stage? 

Overall, the market seems to be in a middle zone as the positives like a strong macro outlook post the fall in crude oil prices and the likelihood of earnings cycle picking up are countered by the valuation being a bit higher than historical averages. Given the price and time correction in mid-caps, we are largely neutral between market cap categories now. We believe that on a three-year basis both large-caps and mid-caps can provide steady returns.

What bearing will the general elections have on the market? 

General elections do cause volatility. Historically, the track record of predicting the outcome and the reaction of the market to the outcome has not been very accurate. Beyond short-term noise, what really matters for the markets is policy continuity. As long as that's there, the election outcome will have limited bearing on the market. Our sense is volatility will be driven as much by global events — primarily the trend in US and China economies — as by domestic factors. 

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

We do believe that a lot of sectors, which have been in a downcycle in the last 3-4 years like corporate-lending banks, pharma and telecom, have bottomed out from an earnings perspective. If commodities continue to be soft, it will be a big tailwind to consumption and banking. The sales growth in the first half of FY19 was robust. Barring a few segments, corporate earnings growth has gained traction. After many years, corporate profit growth will likely surpass nominal GDP growth in FY19. We believe the trend should sustain and earnings trajectory will be healthy from a two-three year perspective.

What are the global cues to watch out for?

The key development to watch out for from a global perspective is the trajectory of the US economy and the Fed’s reaction to it, as this will play out through US bond yields and US dollar strength, which affect global liquidity. Generally, expectations from growth in other major regions like Europe and Japan are low at this point in time. The markets want to see major central banks going slow in terms of monetary stimulus withdrawal. Many emerging markets are likely to ease if the US Fed slows its pace of tightening. Factors like Brexit and oil don't look too concerning. Fed actions and the trade negotiations between the US and China are far more important factors. As long as there is no policy mistake either on monetary policy or on trade, we are likely to see a steady recovery in the markets, particularly in emerging markets.

Some of the money coming into mutual funds is believed to be structural in nature. The recent correction, however, has already seen some pullback in terms of lump sum investment by both retail and wealthy investors. Do you see a reversal in mutual fund flows?

We believe that the shift to financial assets from physical assets is structural in nature and one of the key reasons for this is low inflation levels, which have prevailed for a few years now. Given the recent correction in commodity prices, especially oil, it is likely that inflation may remain subdued. Further, the current asset allocation of Indian households is massively in favour of physical assets and equities are currently a very small proportion of savings. We are also seeing more and more formalisation of the economy, and financialisation of domestic savings will only strengthen. We saw reasonable inflows this year even when Indian macro was under some pressure. Lots of macro and fundamental adjustments have already happened. And with that, the markets are looking far more attractive now versus a year ago. This should lead to increased inflows into mutual funds. We are optimistic that inflows will sustain.