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With the political uncertainty regarding the outcome of the Delhi Assembly polls that partly impacted sentiment over the past few sessions now over, the markets now look forward to the Union Budget presentation in February. Harsha Upadhyaya, chief investment officer – equities at Kotak Mahindra Asset Management, tells Puneet Wadhwa he expects the markets to perform in line with the growth in corporate earnings. Edited excerpts:
Despite the weakness seen ahead of the outcome of the Delhi Assembly elections, the markets have moved up post the actual event. Do you think the market rally has more steam left?
There has been visible improvement in macroeconomic fundamentals, mainly led by global events. The corporate earnings trajectory has improved, barring third quarter results, which in our view is an aberration, given the margin erosion due to inventory losses. We expect corporate earnings growth to be in mid-teens over the next few years. Currently, the market is trading at fair valuations from a long-term perspective. On a conservative basis, the market should ideally move at least in line with the expected earnings growth trajectory.
What about mid-caps and small-caps? Do valuations appear stretched?
In the beginning of 2014, Indian equities were trading at a discount to long-term average valuations. The valuation gap was significantly higher in mid-small caps, compared to large-caps. The strong performance of mid-small caps last year was led by re-rating in valuations from discount to par on long-term average and rebound in earnings growth. This resulted in mid-small caps outperforming large-caps by a huge margin.
2015 is unlikely to present such a differential performance between segments, as the valuations in both segments are broadly the same and near long-term averages. In fact, we believe the mid-and small-cap segments are likely to be more volatile this year compared to last year. We believe it is prudent to remain tilted in favour of large-caps, with say 70:30 mix in equity allocation.
What has been your investment strategy this financial year? Which sectors and stocks make it to your investment list and why?
We initially focused on high operating leverage sectors in the expectation of possible economic recovery in the domestic market. We also bet on oil marketing companies in anticipation of softness in global crude prices and diesel deregulation. In the past few months, our positioning is driven largely by interest rate-sensitive sectors, as we expect benign interest rates.
Do you think retail investors and markets have the appetite for government’s offer for sale in select public sector companies? Would you be looking to increase or take exposure in any of the proposed divestment candidates?
The recent PSU disinvestments witnessed reasonable interest from all investor segments. If fundamentally strong, PSUs are offered at attractive valuations, we believe the investor interest is likely to be strong. If the forthcoming issues are not bunched that would also add to overall interest sustaining.
How are you playing the rate-sensitive sectors like automobiles, real estate and banks? Do you think the next round of rate cut could again be outside the policy and take markets by surprise?
‘We believe the domestic interest rate trajectory has turned downwards. In line with this view, we are currently overweight on interest rate sensitive sectors in our portfolios. It has been clearly outlined by the Reserve Bank of India (RBI) that the interest decisions need not be taken only on policy dates. Latest interest rate cut also happened outside the policy meeting. We expect 50-75 basis point (bps) of interest rate cut during the calendar year.
What is the expectation as far as asset allocation is concerned? What is you view on whether equity funds will do better than debt funds and which ones will give better returns by the end of the year and why?
The returns from equities are likely to be more moderate in 2015 as compared to 2014. However, we believe, there is still reasonable upside in equities given expected rebound in earnings growth. While the expected fall in interest rates will benefit debt funds in the short run, the equities are expected to do well with a lag on this account as well. Therefore, in our opinion, equities may offer little more upside compared to debt over the next year.
In the equity funds segment, what is your recommendation regarding the ones that are worthy of investment - should invest into diversified funds or should investors now go in for some of the thematic funds some of the sectors that are doing well?
In case of thematic funds, the entry and exit decisions have to be right to make money, as investment themes keep changing in the market. Hence, it is advisable for only informed investors. In comparison, diversified equity funds that are well managed are better choices for long term wealth creation.
At a global level, what is your interpretation of developments across the Euro zone and its likely implication? Can it derail the rally in riskier assets like equities or do you expect more aggressive central bank intervention going ahead?
Recently, the European Central Bank (ECB) announced a fresh quantitative easing (QE) programme with monthly purchases of €60 billion till September 2016 and left the door open for further extension of the bond purchase program and indicated that purchases beyond September 2016 would depend on the inflation outlook. While there are geo-political concerns related to Russia and scare of possibility of Greece exiting Euro, overall we believe the Euro region is likely to muddle along going forward.
Overall, the riskier assets may remain more volatile in 2015 compared previous year. Global easy liquidity would, in the meantime, support Indian markets, given India’s improving macro fundamentals that have improved significantly due to fall in global commodity prices.
