Quality mid-caps can outperform next year: Mirae Asset's Swarup Mohanty

We expect gradual recovery in the demand environment next year, driven by low interest rates, government spending, and rural recovery, said SWARUP MOHANTY, chief executive officer, Mirae Asset Global Investments (India). He tells Ashley Coutinho valuation of mid-cap discount to large-caps may narrow in 2020 as risk aversion goes down. Edited excerpts:

What is your market outlook for 2020?

We expect gradual recovery in the demand environment in 2020, driven by low interest rates, government spending, and rural recovery. Globally, there seems to be some positive development on the US-China trade war, while on the domestic front we don’t expect negative surprise on the macros. We believe that many of the ongoing reforms will lay the foundation to a new cycle of stable growth. In this context, we advise investors to stay invested in well-managed funds for the next three to five years.

What is your take on valuations?

From the corporate earnings point of view, the consensus earnings growth is currently pegged at about 21 per cent compound annual growth rate from FY20 to FY22, led by financials and oil & gas, implying price to earnings multiples of 17.6 times the FY21 earnings, which seem reasonable. Earnings are low compared to long-term averages, given that the PAT-to-GDP ratio at 2.5 per cent is at a 15-year low.

What is your view on mid and small-caps as investment bets?

A large part of CY18 and CY19 was characterized by widening of discount of mid-caps and small-caps versus large-caps. The midcap index is trading at a discount of 12-15 per cent to large caps against a premium of about 35 per cent two years back. As economic growth bottoms out, liquidity stays benign, corporate earnings pick up and risk aversion diminishes, we expect the valuation discount of mid-caps to narrow vis a vis large-caps in CY20. That said, we expect only the well run and quality mid-caps with good balance sheets and cash flow characteristics to outperform.

We are in a midst of a slowdown and consumer spending has somewhat taken a hit. What is your reading of the situation?

After August 2019, the government announced several steps to arrest the growth slowdown. The upcoming Union Budget too could lay the path for recovery. The RBI has lowered interest rates by 135 basis points since February 2019. A combination of both fiscal and monetary response should feed into the growth impulse in CY20. A late sharp recovery in monsoon leading to higher reservoir levels also augurs well for rural economy and consumption. Overall, from a macro perspective, we believe the GDP growth is near to bottom and should see a gradual recovery in CY20.

The markets, however, have risen since September without any improvement in fundamentals. How much of a concern is that for you?

We continue to hold the view that markets will be the lead indicator of macro-economic revival, and of the much awaited earnings recovery. The earnings for many sectors are at cyclical lows and we expect mean reversion in the same.

You are already a top 15 player in the mutual fund space. What are your plans for the year ahead?

We have built a good platform and are looking to graduate to the capacity of a complete asset manager. We would like to increase our book size in debt in the coming months and announce our presence in the ETF market with a range of products. Our equity product range looks complete at the moment and we would continue to build track record in them. Mirae Asset is also beginning its journey in other areas of financial services. We are in the process of completing our internal restructuring of forming a holding company. The AMC will become a subsidiary of the holding company. This would enable our promoter to infuse further capital and grow into areas like real estate and venture capital.  

What is your advice to investors at this point in time?

Investors should stick to their asset allocation and work closely with their advisors. Wealth is invariably created by the ability of investors to remain disciplined. In times like these it is easy to stray from the defined path. The challenge is not to let that happen. India’s long term growth story remains intact and it is important to remain invested in the respective asset classes as per one's asset allocation plan.