Mr. Jinesh Gopani
Head Equities – Axis MF
Q. What is your overall assessment of the present state of the economy. Are there any areas of concern or areas where you would seek some action?
Answer: The Indian market has several long-term drivers which, when coupled with structural reforms, can provide attractive and sustainable earnings growth potential over the medium to long term. Moderate inflation levels, moderation in fiscal and current account deficits and policy reform measures to enhance efficiency and productivity of the economy provide a favourable macro-backdrop for corporate India. Hence we believe that from a medium-term perspective, the Indian market remains attractive.
Indian equity market has delivered 16.7% return over the last year. Last year has been characteriszed by a number of key structural steps taken by the government. Demonetisation was a bold step, which has the potential to bring long-term structural benefits to the economy in the form of greater tax compliance and formalisation, although it caused some pain in the short term.
Other key transformational pushes in the last year have been Aadhaar, the bankruptcy law, goods and services tax (GST), and codification of the new monetary policy framework to name a few. Apart from structural reforms by the government, other factors having positive impact on Indian markets have been external demand environment, currency appreciation and improved forex reserves. Both equity and debt net flows have been strong in the last few months. Forex reserves are at an all-time high. INR has been amongst the best-performing Asian EM currencies. We believe that the equity market is sensing the shift in economic activity and valuations are reasonable considering we are at start of a new multi-year cycle.
Some risks on the horizon are an external shock (such as from the potential shrinkage in the Fed balance sheet), a surge in equity supply and delay in NPL resolution.
Q. The government seems to be inching closer to majority in the upper house which comes at a great time with just two years to go for general elections. Which reforms, in your opinion should be on the government's priority list to further boost the economy and why?
Answer: The biggest risk to the macro story currently is the lack of private sector capex and the unresolved stress in bank balance sheets. While initial steps have been taken to fix the latter, it will still require some more drive from the government in order for the banking system to emerge from this situation. Some of the ideas around bank consolidation, part privatization have been around for long and need to be explored. Further reforms in the land and labour rules which have been stymied so far can also be revived.
Q. There has been a substantial rise in the number of retail folios and SIP contribution by investors in the recent past. How do you see this change and what do you think are the reasons for same?
Answer: The key driver has been shift from physical to financial assets. Traditional physical assets such as gold and real estate become less attractive in a low inflation environment. Further falling interest rates are helping push investors from traditional investment options towards equity. So from relative point of view mutual funds look more attractive as an investment opportunity at present.
We believe that there also is shift in investor perception about mutual funds. Equity investment as a culture is getting more attention. With increasing awareness, investors are learning to overlook the market’s short term movement and focus on economic prospects in the long term. Investors have started looking at MFs as a serious long term investment rather than a quick money making route. Further use of tools as such SIPs and asset allocation/ balanced funds augurs well for the long term experience of investors in Mutual Funds.
Q. With the markets floating at all time highs, there are concerns on valuations. What is your investment strategy in this market and how are you deploying your funds?
Answer: Whether the valuations would sustain at current level, depends on how robust the earnings recovery is and how sustainable it will be. While trailing PE multiple may look high, the denominator, the earnings, is low as corporate India’s ROE (return in equity) is yet to revert to its long-term average. With significant improvement in macros, including global environment, we expect corporate earnings to improve over the next few years and thus are broadly comfortable with the valuations – although there seems to be a bit more froth in select mid and small cap stocks.
Q. We would like to hear your comments on sectors that are at the top of your mind w.r.t. risks and opportunities they present today.
Answer: We have been bullish on private banks, selective NBFCs, auto, auto ancillaries and consumption basket. Private Banks are expected to do well as they are on a strong wicket in terms of capital requirement, in terms of return on equities and in terms of growth. We believe that structural growth story in financial sector is linked to low credit outstanding as well as overall GDP growth. Rising awareness, easy access, and improving lifestyles are the key growth drivers for the consumer durables. There is a scope for rural consumption to grow due to huge unmet demand driven by higher income levels as well as increased penetration of brands. Low penetration along with lower interest rate environment bodes well for the auto and auto ancillaries sector growth. Demand is likely to accelerate over medium term owing to robust growth in domestic automotive industry, increasing investment in road infrastructure and growth in the working population & middle class income expected to drive the market.
However, we believe that while constructing portfolios, the companies and businesses need to be identified on pure fundamentals based approach irrespective of sector outlook.
Q. What would be your advice to someone who is looking forward to invest in equities at this time? Assuming he is aiming for long term wealth creation, what strategy and time horizon would you suggest for him?
Answer: We believe that this is a time when India's structural long term investment thesis is getting a boost from all the structural reforms as mentioned above. According to us long term investors should invest regularly and not worry about potential short term market volatility. Further they should not try to time the market and instead look to stay invested for the long term in order to participate in this story.
We all know from the long history that markets do overshoot on both sides and that timing the market is not easy for most retail investors and in fact actually destroys value. The whole point of regular investing through vehicles such as SIP is to not worry about market timing and valuations. SIPs should remain the primary vehicle while lump sum investors should look at staggered allocations to the equity markets without paying too much attention to the day to day market noise.
This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
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