India will continue to be attractive growth market

The Indian markets are delicately poised with most macro indicators looking up positive and high probability of inflation subsiding by second half countered by strong risk off environment of high global inflation and low global growth which is taking money from equities globally. The sharp rise in the global yields will put pressure on global equities. Recovery of Indian markets and returns in the short term would depend on global equities outlook which is hazy at the moment. "In the longer run, India would continue to be attractive growth market with strong demographics, rising per capita income, strong domestic demand and one of the few economies with strong services and manufacturing footprint," says V Srivatsa, Executive V-P & Fund Manager – Equity, UTI MF in an exclusive interview with Bizz Buzz

How would you advise investors to navigate the volatility and what strategy would you suggest to the investors to combat volatility?

Volatility is inherent in the equity markets and the best way to manage the volatility for the investor is investing at regular intervals through SIPs. Also, at times markets do tend to trade at slightly lower multiples on account of global related factors and markets have rewarded investors who have invested in the lower levels. Hence investors should also allocate money based on valuation of the broader indices.

What is your outlook on the current market scenario and the overall basket of market performance?

The Indian markets have relatively outperformed most of the global markets by a wide margin year to date (YTD) based on relatively stronger growth outlook and far less impact of energy inflation as compared to rest of the world. The Indian markets are delicately poised with most macro indicators looking up positive and high probability of inflation subsiding by second half countered by strong risk off environment of high global inflation and low global growth which is taking money from equities globally. The sharp rise in the global yields will put pressure on global equities. Recovery of Indian markets and returns in the short term would depend on global equities outlook which is hazy at the moment. In the longer run, India would continue to be attractive growth market with strong demographics, rising per capita income, strong domestic demand and one of the few economies with strong services and manufacturing footprint. Indian markets would attract flows from global investors, however given the sharp outperformance in the last one year as compared to other emerging markets and more than 60 per cent valuation premium to emerging markets, Indian markets run the risk of allocations in short run to other emerging markets. Hence we continue to see high volatility in the short run while the outlook for long run in equities is sanguine.

What are your views on the pharma sector in the current scenario and how would you describe the performance of UTI Healthcare Fund/UTI Core Equity Fund?

The pharma sector has underperformed in the last five years led by big disappointments in the USA generic markets where price declines are very high and growth avenues have hit a roadblock as markets are well penetrated and quality issues across companies have impacted new product launches. Also, the domestic markets faced challenges in the GST migration and Covid impact which impacted growth. In the short to medium term, we see the USA markets bottoming out in prices and growth outlook has improved a bit as compared to last few years and also most of the companies have defocussed on USA operations and shifted their focus on domestic operations. Domestic operations are structural long term story given the huge under penetration and rising affordability. Another segment of healthcare is the hospitals, where also we see good long term growth prospects and the sector has seen good consolidation in the last few years which would lead to better growth and return ratios across the listed entities.

The UTI Healthcare Fund has underperformed the benchmark in the last one year led by our underweight on the large cap generics and our key mid cap bets underperforming. We have a good mix of domestic oriented stocks, generics and hospitals which is a good proxy for the sector.

In case of UTI Core Equity Fund, this is a large and mid-cap fund as per SEBI category and we have around 38 per cent invested in mid-cap and around 50 per cent in large-cap and balance in small-cap. We follow a relative value approach where we try to identify good quality stocks or sectors trading below long term valuations; and also, in mid and small cap stocks, we focus on growth oriented stocks which could be available at reasonable valuations.

The UTI Core Equity Fund is invested in domestic oriented sectors such as financials, automobiles, capital goods and also decent exposure in Information Technology.

The fund has marginally under performed in the last one year as growth oriented large caps have outperformed in the last one year where we did not have exposure. The fund has good mix of good quality value stocks which would lead to good long term performance.

Which sectors do you think are likely to do well in the near to medium term and the sectors/ themes that can over and underweight for portfolio strategy?

In terms of the sectors, we remain positive on the domestic oriented sectors such as banking and financial services, automobiles and components, Domestic pharma and Industrials while being underweight on metals, oil and gas, consumer durables and FMCG. We would avoid global cyclical sectors on the back of weaker global demand which will put pressure on the prices. However, we have a slightly overweight position on Information Technology as tech spends continues to be strong and valuations are very reasonable. Our largest weight is financials, where we believe that the banks are poised for strong earnings cycle in the medium term driven by strong credit growth, rising margins led by faster repricing of assets than liabilities and cyclical low credit costs as the banks come out of an eight year credit cycle. The balance sheet of most of the banks have improved with banks across the sector sitting at least 12 per cent capital adequacy ratio. Valuations of the banks are reasonable with regards to the growth prospects.

We also have a decent active weight in the auto sector as the autos are coming out of six year downcycle with every segment being in the bottom of the cycle. Giving the sharp recovery, we believe that the sector is poised for strong recovery and the valuations do not factor the recovery.

We also run underweight on consumers both FMCG and durables as the valuations at around 50-60x are at huge premium to the market and long term history and the forecasted sales and profits could be lower than the implied market expectations for the sector. While the growth prospects for the sectors are very good, the valuations implies far higher growth and margins for the durables and FMCG sector which makes us underweight on the sector.

We remain underweight on oil and gas and metals as we believe that given the global slowdown and high chances of recession, the demand for metals and refined products could be lower than the market expectations and prices could also be under pressure as a result of subdued demand. Also, the high global energy costs would impact the metals sector in terms of costs and suppress the margins.