"Trying to catch mkt cycles is hard to implement"

Invest across market caps based on risk appetite, goals, Vetri Subramaniam, Group President & Head of Equity, UTI Mutual Fund, tells ET Wealth in this interview. He also believes that the consumer discretionary sector such as companies in retail, travel and leisure could benefit as we get past the pandemic and vaccination accelerates. Here are other insights from the wealth manager. The market pullback amid a strong covid second wave has been modest. Is the market expecting a quick recovery or simply unsure of its impact?Over the past few months, many countries have experienced second or even third waves and there are examples of their equity markets trending higher through such episodes. The same may be the case for India. I do not have an explanation for this.With 25% plus earnings growth factored into prices, isn’t there risk of a deeper cut if earnings continue to disappoint?Valuations are elevated at the market aggregate level and that suggests the market is cognisant and confident about forward estimates. If history is any guide, this poses a risk to stock prices and could eat into future returns. There is reason to believe that record low interest rates, low tax rates, policy reforms and cheap capital are setting up a medium term upcycle in India. This was the belief before the risk to earnings in the current year from the second wave manifested. More than the risk to 2021-22 earnings I believe that, if for whatever reason confidence in the medium-term cycle were to fade then the valuations would weigh heavily on forward returns.Is the broadening of market rally likely to sustain for long?The markets experiences cycles. Early 2018 to mid 2020 was a period where a narrow set of heavyweights dominated the broader markets. Prior to that the market rally had been quite broad-based with record outperformance by small and mid-cap stocks over a five-year period. Now we are witnessing an environment in which small and midcaps are doing extremely well and outperforming the heavyweights. It could persist a while given the easy liquidity conditions. However, my advice to investors would be to allocate across the market cap spectrum based on risk appetite and financial goals. This is more important than trying to catch cycles, which sounds attractive in principle, but is very hard to implement successfully. How do you read the nascent recovery in value theme?Historically, when the market is trading considerably below the long-term average valuations, it bodes well for value theme to outperform. Similarly, when valuations surge to a premium to the long-term average, which is where we are now, it becomes harder for value theme to perform. In other words, the outcomes are distinctly favourable when the initial conditions are conducive. There is still a relatively wide gap in valuations between growth and value names though not as extreme was it was in mid-2020. Further, these value cycles play out best when they are slow with earnings compounding concurrently over time. The move for the Nifty 50 index from nearly two-standard deviations below Long-Term average PB in March 2020 to above one standard deviation over the Long-Term average PB by February 2021 has been swift. Such movements pose a risk. As the valuations have moved up significantly, we now need earnings expansion in some of the value names to continue for an extended period for the value theme to sustain its momentum.Which sectors or themes are investment worthy now?We think pharmaceutical and healthcare remain attractive. Valuations are attractive in the context of the structural growth opportunity in India and the global competitiveness of generic companies. Automobiles have been through a downturn for nearly two-three years now and we think the demand story driven by low penetration is attractive. In banking and finance, things are slightly challenging in the near term due to the second wave and localised lockdowns. But we believe that there are a handful of institutions in this sector that can benefit from the market consolidation as we navigate this crisis. They have provided for NPAs, created buffers, raised capital and they enjoy the trust of depositors and bond markets.Do any of the covid-hit sectors particularly appeal to you?The consumer discretionary sector such as companies in retail, travel and leisure could benefit as we get past the pandemic and vaccination accelerates. However, it is important to focus on balance sheet strength. Your flexi-cap fund has much higher exposure to mid-caps relative to its peers. Do you sense greater opportunity in this basket?The UTI Flexi Cap Fund is managed as a bottom-up strategy focused on buying quality and growth stocks. Our exposure to mid- and small-caps has been at 35% on an average and we expect it to remain in that range. We do not alter the positioning in the fund in terms of swinging between stocks based on market cap. Our exposure in such mid and small companies is a function of their demonstrated track record, cash flow generation that supports growth and the potential growth runway.After Nifty Next50 and Nifty200Momentum30 index funds, is UTI AMC looking to expand its passive offerings?We are witnessing a significant uptick in demand for passive funds, including what we could call smart beta funds. The smart beta strategies allow investors to choose specific factors that they would like to emphasise while staying within the confines of a disciplined approach. We expect to launch more smart beta products and we are exploring the launch of a few sector funds this year. We are also exploring passively managed debt products in the coming future for our investors.

from Economic Times https://ift.tt/3yqTYxY