The domestic equity market is trading at a premium to its current fair value. However, even if this premium shrinks materially, returns from equities over the medium term may be modest, due to the growth in fair values, says Vinay Paharia, chief investment officer (CIO) of Union AMC in interaction with Swati Verma. Edited excerpts:
The market has been on an upward trajectory since the beginning of March. Do you feel this rally is sustainable?
We are approaching the market with cautious optimism. On the macro front, an important development in the last month has been the about turn in monetary policies by the US Federal Reserve (US Fed) and European Central Bank (ECB). Both these large central banks have changed the policy from expectations of quantitative tightening to quantitative easing. This bodes well for risk assets like Indian equities and bonds. Additionally, monetary policy in India has turned accommodative and hence is a tailwind. However, we remain worried about the recent slowdown in the economy, led by weakening consumer demand and also remain cautious of premium valuations.
There has been a slowdown in the flows to mutual funds in the past few months. Will April be different?
It is difficult to predict near-term investment behavior; hence I would not hazard a guess on this. That said, we think that over the longer term, Indian household savings in mutual funds can significantly increase from the current levels, led by the financialisation of savings.
How comfortable are you with the current valuations of Indian stocks?
Markets are trading at a premium to its current fair value. However, even if this premium shrinks materially, returns from equities over the medium-term may be modest, due to the growth in fair value. Hence, we remain cautiously optimistic on the markets.
There has been a widespread consensus that the current NDA-government will come to power again. How much impetus it is going to lend to the stocks?
While the government and its policies are an important driver of economic performance, it is difficult to judge the impact of political changes on the market. Historical market performance before and after elections have been random and hence we should not solely base our investment decisions on the same.
The World Bank expects a slowdown in economic growth in the near-term, led by developing nations like the US and the EU. For India, while this may result in some slowdown in trade. Since we are a largely domestic economy, hence are significantly insulated from such a slowdown. Slowing global growth can also result in a decline in commodity prices, which can act as a margin tailwind for corporate profits.
What has been your investment strategy in the last 12-18 months?
Our investment strategy in most portfolios has been to buy growing companies at a reasonable valuation. Over the last 12 months, we have been significantly overweight on the large-cap stocks. However, over in the last three months, this overweight position has reduced significantly as we have nibbled on attractively valued small and mid-cap stocks. Currently, we are overweight on consumer discretionary and utility sectors and underweight on materials and consumer staples.
Last year, Japanese financial services firm Dai-ichi Life Holdings, Inc. bought 39.62 per cent stake in Union AMC. How has been the journey post that?
Our joint venture partner has brought in significant capital and a strong brand name with it. Dai-ichi Life is a very strong brand in Japan and has significant experience in the asset management side also. We expect the partnership to yield significant benefits for both parties over the medium-to-long term.
In which scheme retail investors’ participation has been the maximum?
Investors have significantly increased their equity allocation over the last few years. Our experience also has been the same. We have received good inflows in our equity and hybrid schemes such as the Balanced Advantage Fund over the last three years.
Auto stocks have corrected sharply since the second half of the calendar year 2018 (CY18). Is it a good time to buy these stocks?
We are overweight on the consumer discretionary sector. Within this, we have most of our exposure to auto stocks, as we feel the risk-reward payoff is favorable for the investor.
What about the information technology (IT) sector?
We are marginally overweight on IT sector. While the sector is doing well, the rise in valuation has reduced its attractiveness.