Given the fact that consumption accounts for almost 65% of GDP, it’s no surprise that Anoop Bhaskar, head of Equities at UTI Mutual Fund, has the spotlight of funds clearly on the booming sector. And he’s clear that the momentum will continue unless the investment cycle returns. In this second part, he tells Nitin Shrivastava that valuations of the sector are an area of concern though.
Where are we in terms of the corporate earnings cycle?
Unfortunately, market sentiment doesn’t translate into improved cash flows. If you have a slightly longer term perspective of 5 years, we are at a stage of economic cycle where growth tends to accelerate in the medium to long term and earnings trajectory won’t be a concern. But if you have a near-term view, one needs to be cautious as valuations have run ahead of ground reality.
Any tactical changes to benefit from market surge?
Though the tide of liquidity has lifted the equity market, one needs to be cautious not to buy below-par companies at above-par valuations. We continue to retain our large cap focus across most of our diversified funds which would translate into underperformance probably in the near term as mid caps and small caps have delivered returns twice as much compared with Nifty over the past two months. Also, there has been churning within sectors, say, from private to PSU banks due to valuation differential but we have not played catch-up. On a longer term, the stability of management and flexibility to perform is a far safer passport to outperformance than to time the market. PSU banks have hardly given any returns over the longer term of 4-5 years even though you may find sporadic bursts like the current one where they outperform substantially.
You still have the second-highest weightage to FMCG in your growth funds.
We have reduced our weight on FMCG by quite a bit. We have funded our banking exposure by reducing FMCG on valuations concerns as they are trading close to 1.5 times standard deviation of the last 5-10 year average valuations and approaching stress points where two times the standard deviation is considered as a bubble area, according to Jeremy Grantham model... But if you look at the way Indian economy is structured with almost 65% of GDP coming from consumption, FMCG companies would continue to be an important play in the consumption cycle... Unless and until there are very clear signs of investment cycle returning, these companies should continue to report a healthy pick-up though valuations are a concern. So, FMCG companies that are in sectors hard to enter would remain an integral part of the portfolio.
The other sectors you are positive on?
Interest-rate sensitive sectors should benefit. A lot of asset owners whose assets are completed will find the value of their assets going up because interest rates would have fallen. There would be some pick-up in investment and therefore, we have picked up cement where the company balance sheets are strong, profitability is not an issue and there’s no threat of imports either. As a commodity, we would rather play cement than other metals where there’s more uncertainty.