Budget a lost opportunity to revive growth: UTI AMC's Vetri Subramaniam

In the context of slowing growth and little drivers to revive the economy, Vetri Subramaniam, group president and head-equity at UTI AMC says the recently presented Union Budget may not be the right tool to revive sentiments. In an interview with Hamsini Karthik, he says Indian equities may remain polarised and that growth may just chase some select pockets such as the market leaders. Edited excerpts:

Has the Union Budget adequately addressed the issue of economic slowdown? 

The finance ministry could have done more in terms in fiscal stimulus but it instead choose to remain committed to fiscal consolidation. We could have gone beyond the 0.5 per cent increase in fiscal deficit, so in that sense I think the Budget is a lost opportunity as an exercise to revive economic growth. It’s hard to think how the economy will bounce back without some of the infrastructure-related push. The more concern is the way Direct Tax Code (DTC) was communicated. It seems to be extremely confusing to the extent that a tax payer will have to choose whether the new code should be adopted or retain the old slabs and what it is that (s)he would be gaining or losing on this front. More importantly, DTC wasn’t meant to take away the benefits, it was only planned to rationalise the tax structure. The government has delivered a rate cut, but has taken away tax exemptions. It could leave people confused. 

There’s also a growing disconnect between the broader markets and fundamentals. How do you marry that?

Markets and the economy are never utter perfect equilibrium. In the previous five years, when mid- and small- caps massively outperformed the large caps and in a way, now is their payback time. Markets are polarised in favour of a select set of large caps where people did not participate earlier. Growth of some larger companies has been pretty good. They are taking/gaining market share from the unorganised players. It may be to do with the tax crackdown, RERA and GST that the market benefits have gone to a select few. And we see this across sectors. That makes a favourable case for market leaders in every sector and we see that just getting stronger. 

Where are the pockets of comfort at this juncture?

There is something in the market which is under-priced and something which is over-priced - valuation is not a timing device. So, certainly there is favourable risk-reward in some pockets. There are bottom-up opportunities in mid- and small-caps and even within the Nifty50 considering the polarisation within the index stocks. At an aggregate level, the data is suggesting that we have gone back to a normal environment as mid-caps are at a discount to large-caps. Allocation to mid- and small-cap is also favourable at this point in time and where we have the flexibility, we have raised our mid- and small-cap exposure. 

That said, the market is somewhere between fair value to expensive. When you look at the five year, returns of large-cap and mid-cap indices look similar. This is also a function of the market being so rich, that it's difficult sweat it for returns. While returns are attractive from the lows of August 2013, they are only 9-10 per cent for benchmark indices. 

Which sectors stack up favourably now?

I think in most conversations with mutual funds (MF) heads, because of our compliance rules, we end up talking sectors. But, that has been self-defeating. Sectoral approach isn’t the source of alpha. Purely from the fund I run, (Value Opportunities), we prefer sectors which give us valuation comfort. Pharma is one area where we've been positive. Through last year, we have increased our positions in auto stocks; these are standout positions for us today.

What about your exposure to telecom?

Some businesses just experience cycles for the nature of the industry or regulatory-led or external factors. In those sectors, you look for companies which have demonstrated management capability to tide over difficult times - they've demonstrated how to exit a difficult time and when they come out of it, they sort of tend to do even better. So, what we thought was there would be one survivor and we have held this thought for two years. We didn’t anticipate AGR (aggregate gross revenue) to become such a big issue and then eventually lead to being a pressure point on the supply. But it seems to be deciding the way the stocks are performed.

SIPs remain the source of flows for MFs, does that bother you at some level?

Outside of SIPs, equity inflows are negative. But its not a bad thing people are continuously allocating on little drops of money every month and that’s adding up to a lot in aggregate. It’s better than having an environment like 2008 where somebody launches a fund and gets a massive inflow and getting stuck later. This is healthy from a risk point of view too. Nobody is getting overexposed all at once. There are SIP cancellations and that has gone up but net-net SIP inflows are still positive.