Markets in honeymoon period, not looking at reality: Sundaram Mutual CEO

Electoral uncertainty getting over and earnings outlook guidance from bellwether companies are some of the key triggers that mutual funds await to start aggressively investing in the equity segment, SUNIL SUBRAMANIAM, managing director and chief executive officer at Sundaram Mutual tells Puneet Wadhwa. Edited excerpts:

What’s your market outlook for the rest of the year?

Market outlook for the year is one of continuing volatility, but expect it to end the financial year on a new high. A fractured mandate will not be initially welcomed by the market and can lead to higher volatility. There may be maybe a correction in case the election outcome springs a surprise. That said, earnings growth will be in line with market expectations and hence there should be a recovery in the overall sentiment in six to nine months. The Nifty50 can hit 12,500 levels by the end of financial year 2019 – 20 (FY20).

The recent rally has been led by foreign flows. What’s keeping mutual funds (MFs) from investing aggressively at the current levels?

Electoral uncertainty getting over, earnings outlook guidance from bellwether companies, strong government and capacity utilisation in economy reaching 80 to 85 per cent are the key triggers that MFs await to start investing in the equity segment. Our investment strategy has been focused on consumption and retail banks from a short-term perspective. However, in the medium-term, the portfolio is tilted towards cyclicals and corporate banks. 

Your view on corporate earnings in FY20?

Earnings should be 15 to 17 per cent in large-caps, 18 to 22 per cent in midcaps and 20 to 30 per cent in small-caps. Earnings surprise will come from banking, capital goods & cyclicals and from the auto sector. Information technology (IT) and pharma will continue to underperform consensus estimates.

What are the average cash levels across funds / schemes?

Cash levels are at 3 to 5 per cent across portfolios – up slightly as compared to the last year. Retail flows should continue to be strong post elections also. In fact, infrastructure, cyclical, mid-and small-cap funds have seen good money flow into them since the last one month.

Your overweight and underweight sectors?

Discretionary consumptions, banks and cyclicals are our overweight sectors. On the other hand, IT, Pharma and non-bank finance companies (NBFCs) are our underweights from a 12-month perspective.

Are the markets factoring in the possibility of a higher fiscal deficit due to higher oil prices, especially in an election year?

No, markets are not factoring in this yet. They are in a honeymoon period and not looking at reality. The reason for this has been the supply of foreign money. Domestic fund managers have been smarter and held money in cash. Foreign money came to Indian shores on account of hope of a stable government and the stance of the US Federal Reserve as regards rate cut. This has taken valuations higher. Post elections, the dust will settle in six to nine months in the backdrop of new political equation. The underlying footprint of the economy remains strong.

Flows into Systematic investment plans (SIPs) have slowed over the past few months. Does that in effect reflect that the retail investors are not confident about the road ahead for the markets?

My reading is that investors who had done one-year SIPs have not renewed. That said, there have been no redemption pressures. Investors are waiting for the election-related uncertainty to go away. 

How is the distributors coping up with the wiping out of the upfront commission by asset management companies (AMCs)?

The readjustment process is still on. A lot of smaller distributors are a bit worried about their business model. Some of them are even talking to larger companies and larger distributors to see if they can become their employees. New customer acquisition will be the first thing to get a setback. For us, nearly 40 per cent of distributors were on a trail model and are safe. The real impact will come to fore in May in terms of expense ratios and all commissions will get reduced on their existing book. Baring one or two funds, our expense rations will not change. 

Do you think the recent developments regarding the delay in redemption in fixed maturity plans will make investors shy away from this segment as well? 

A lot of readjustment has taken placed in terms of how NBFCs are getting financed now. The IL&FS issue had a domino effect. The impact of this on closed-ended FMPs will only be felt as they mature over a period of time. We may hear more such cases going ahead, but it is difficult to predict all this right now.