Markets not expensive, earnings should improve, say top fund managers

Risk-reward more favourable in large caps than mid- and small-caps

The Indian equities are favourably valued on parameters such as market capitalisation-to-GDP and price-to-book value, say the country’s top fund managers.  This is in contrast to the popular perception that Indian markets are expensive as it trades at a price-to-earnings valuation way above its long-term averages.

“There is this notion that the markets are expensive. I feel differently. India’s market cap-to-GDP ratio is very attractive. It is true that earnings have been weak in India but that will change maybe from this year itself,” said Prashant Jain, executive director and chief investment officer (CIO), HDFC MF.

Anup Maheshwari, CIO – Equities, DSP BlackRock MF said there are several developed markets, including US, are currently trading at 140 per cent of their GDP but that ratio for emerging markets, especially India is still below 100 per cent.

“In the past few years, the developed world has done better than the emerging markets. This could change in the next five years, India and other EMs could do better. We are comfortable marketing India to the global audience,” said Maheshwari.

In recent months, equity mutual funds have been aggressive buyers of stocks even as foreign institutional investors (FIIs) have been taking money off the table. Money managers don’t see this as a worrying trend.

“When there is a bubble. Both FIIs and locals are on the buying side. Currently, we are seeing one selling and the other buying, which is a healthy sign,” said S Naren, executive director and chief investment officer, ICICI Prudential MF.

All the three fund managers were speaking at a panel discussion at the Morningstar Investment Conference 2017.

The Indian markets have rallied around 20 per cent this year. The broader market mid- and small-cap indices have continued their outperformance over the benchmarks this year. Fund managers believe the risk-reward currently could be more in favour of large-caps and investors with relatively low-risk appetite should stick to large-cap investing.

“Whenever markets fall, big investors, such as insurance companies, buy large caps. Hence, large-caps are more defensive bets. Small- and mid-caps may don’t do that well. Hence, people wanting to take risk should opt for pure large caps,” said Naren.

“On valuations alone large-caps look better. We are more comfortable up the market value chain. There are great companies in the midcap space but one needs to have much higher degree of comfort given the run up in valuations,” added Maheshwari.

Jain said the market respects profitability more than anything else and sectors and stocks which will deliver good profits will be rewarded. Citing the example of depressed valuations of oil market companies (OMC) when they were saddled with the subsidy burden, he said investors can find value in sectors and stocks when they are going through pain.

Jain said the risk-reward ratio is reasonable in the information technology sector. “They are challenged with low growth rates but have attractive businesses and return on equity. If growth rates improve, investors can make reasonable money.”