Investors Should Come to Equities, Equity MFs Expecting Steady Returns..

Investors Should 

Come to Equities, 

Equity MFs 

Expecting 

Steady Returns..

by Mr. Anoop Bhaskar, 

Head-Equity, 

UTI Mutual Fund

Investors should come to equities expecting steady, not surging, returns.

We believe investors should relocate their investments to equities and equity mutual funds (MFs). But they should not have unrealistic expectations.

Last year’s returns will not be matched, going forward. So, do not come hoping for last year’s returns but you will get steady returns for the next 2o or 3 years if the economic recovery pans out as we are all hoping. The returns will be in the mid-teens rather than the high double digits that we have seen.

A year back the investment thought process was a bit sedate. There is always a pre-election rally but it peters between one and 3 months. The (poll) mandate this time was the strongest in almost 30 years.

Also, it was one of the few elections which coincided with an uptick in the economy. It was very difficult to predict last year that there will be such a big rally.

Anoop Bhaskar, UTI MF

Valuations..!

It has been like a Brazilian carnival for small-cap & mid-cap stocks. A Brazilian carnival, however, lasts only for 40 days; the small-cap and mid-cap rally had been on since January.

That has to lose steam at some point. The valuations do not offer much upside for another re-rating. Small-caps are the most overvalued, followed by mid-caps and then large-caps.

The hope is that the earnings growth in these sectors will be so sharp that no analysts will be able to project this.

Sector rotation..!

In the first part of the rally, it was the public sector banks (PSBs) and the so-called cyclical stocks, where valuations were compressed, which did well. In the past 3 months, the worry that the market has reached fairly robust levels has seen the high-beta stocks take a back seat & better-quality companies have done well.

So, sectors such as pharmaceuticals & technology services, where the quality quotient is better than cyclical, have done better post-elections.

Position yourself..!

In times like this, you stick to high-quality companies rather than get extra courageous & buy high-beta. Look at companies where there is sufficient room to improve the operating leverage but are not financially stressed.

This means you are sacrificing a bit of return but also ensuring that the volatility of returns would be lower. We are not in the camp which believes the government will have a lot of ‘big-bang’ reforms.

We also do not believe there will be a sharp economic recovery. Our view is that there will be steady recovery.

We think the story is about buying companies rather than buying ownership. It shouldn’t matter if the company is government-owned or private.

Bull run & correction..!

Every bull run gives you 100% returns and it lasts for 2 years. From that point of view, we are just halfway through. Almost 80% of the growth in the bull markets, in the past, has come from earnings expansion & not actual growth.

The fourth quarter of this financial year is going to be a very crucial phase of this bull run. You will have the Budget in February, 2014 when the government will not have any excuse that they did not have time. Investors will also want at least some sign of earnings growth for the March 2015 quarter.

If both of these disappoint, then you have to worry that the market will take a period of 2 or 3 quarters of adjustment. That’s also the time when the US Fed (their central bank) will increase rates.

Till the fourth quarter of this financial year, the market might not correct significantly.

The macro factors for India will be positive. Fiscal deficit will keep coming down, there is increase in spending on infrastructure.

At some point, the Reserve Bank of India (RBI) will start cutting interest rates. So, that gives a hope that even if things do not work as well as thought or / if there a disastrous second budget, the market will not collapse as in the past, since other levers are in place.

Investor inflow in equity..!

Nearly 40% of net inflows into equities in recent months are flows into arbitrage funds. If you factor that out, the flows become much more modest. Financial assets, due to inflation, have underperformed physical assets in the last 5 years.

So, gold or real estates have been the preferred routes for investing. Only in the past 2 years have equity returns outpaced physical assets. As inflation comes down & as financial assets start to perform once again, investors will come back.

Equity, as an asset class, is at least a point of discussion for investors. It was not even a point of discussion 2 years earlier.

Most of our funds are based on being more consistent. We have had steady inflows. We have lost market share but our philosophy remains the same, to be more consistent.

UTI Focussed Equity Fund-Series I (1100 days) has received an overwhelming response from investors during the NFO period (from August 13 to 27, 2014). The scheme has attracted more than 67,000 applications and garnered more than Rs.770 crores. 

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