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| Edited By: Arpita Saxena |Source: DNA |Updated: Jun 06, 2017, 07:15 AM IST
Dalal Street is witnessing an upsurge with both key indices breaching record highs and Sundeep Sikka, executive director and CEO, Reliance Mutual Fund sees the uptrend continuing. The recent rally has stemmed from hopes of recovery in company earnings, he says in an interaction with Arpita Saxena.
The current valuations are at a premium to the long-term averages, however, our view is India is likely to witness a structural growth trajectory for the next 8-10 years. We have the best-ever macros with low oil prices, low inflation, lower interest rates, a very stable currency and lower fiscal deficit. The government has been very affirmative and pushing towards historic reforms like the goods and services tax (GST), Make in India, less cash, direct benefit transfer, etc, and growth also looks like picking up meaningfully in the near term. Domestic investors have become more matured and are systematically investing in equities. This makes us happy as in the past only foreign investors have benefited out of the huge wealth creation by Indian companies. In the past three-four years, we have seen more investments by domestic investors and they have also reaped the benefits of good equity returns.
We remain confident of earnings recovery over the next few quarters as macro-economic variables like interest rates remain supportive for overall earnings growth recovery. Over the last two financial years, the index earnings were compressed due to sectors like banking and metals, which had witnessed much lower growth. This lower base of earnings should also facilitate an uptick going forward. Stabilisation in export growth will also be another supportive factor to drive earnings in the next 12-18 months.
Even though markets have risen, earnings are still behind. Total India Inc earning is around $69 billion which is barely 3% of GDP. Again, normalised corporate profits to GDP are 4.5-6%, which suggests markets are on a very low base, thereby implying markets have run-up in anticipation that earnings are going to rebound. While markets are risen to 9400, it’s just a number. We feel the market will keep scaling higher and absolute market should not matter at all.
Over the last two decades, there have been multiple periods of events and corrections in the market. We have had IT bubbles, Lehman crisis, Fed tapering, scams, political issues, global meltdowns, Brexit, US elections, etc. However, the markets have always taken these events in its stride and moved ahead. The bottom line is very clear: in a growing economy, corrections will come and provide the best investment opportunities. Ultimately, investors who have stayed put have reaped the maximum benefits. Our advice would be to not complicate investing - Have faith in the Indian economy and decent returns will be made in India equities over a period.
Over the last couple of years, midcaps have significantly outperformed the large caps as the economy was recovering meaningfully supported by improving macros and policy reforms. Midcaps and smallcaps tend to outperform large-caps when there is uptrend in the markets, broad-based market movements and risk-seeking behaviour. Given the strong rally in the mid-cap space over the last two years, from a valuation perspective, large-caps appear to be relatively attractive. Also, in case there is some correction post the strong rally the mid-cap space can correct more than its large-cap peers. However, if we take a medium- to long-term view and expect the domestic growth to improve further, the mid-cap space can continue to outperform over the next three-four years. That said, the extent of outperformance can be lower, given the run-up we have seen in midcaps in the last couple of years.
ETFs have delivered competitive returns versus large cap funds primarily due to lower expenses. Also, as markets mature the alpha possibilities especially in the large-cap space becomes limited. We have witnessed this phenomenon in developed markets where a large section of active funds underperformed the benchmark. Thus, ETFs can offer a competitive investment alternative to large-cap investors. However, given the domestic growth prospects, there can be alpha-generating opportunities especially in the mid- and small-cap space, which can witness emergence of new themes, new sectors, etc, providing alpha opportunities. Hence the actively-managed multi-cap/mid-cap funds can continue to outperform for the medium- to long-term funds, while investors seeking market returns with lower deviations can evaluate the ETF option.
