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'The Outlook For Earnings Growth Is An Improving Trend, But The Challenge Is Valuations'
In an interview with BW Businessworld, Sachin Trivedi, Senior Vice President, Head of Research & Fund Manager – UTI AMC, speaks about Nifty, mutual funds, GST and more
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The NIFTY seems to be stuck in a narrow 1,000 point band for now. What would it take for a breakout (or a breakdown) to occur from this band?
At the current juncture the outlook for earnings growth is an improving trend but the challenge is valuations. Valuations have corrected a bit from where we were in January 2018, but it is still expensive. That remains a cause for concern. These high valuations were partly on account of expected growth in corporate earnings. For example Nifty 50 is trading at close to 22x trailing P/E (source; Bloomberg) and midcap indices are trading at higher levels as compared to Nifty 50. In the last couple of years actual earnings growth has been much below when compared to what was consensus expectation at beginning of the year. However, pace of downgrades in earnings have gone down in recent quarters. Best of the macro-economic environment like lower inflation, low crude prices and low current account deficit is also behind us. Monetary tightening by global and local central banks and currency movement can also lead to increased volatility in markets. On the other hand some of the micro indicators (like car and 2 wheelers sales and consumer staple sales) are improving. Eventually in medium to longer run, markets pay attention to growth in earnings and quality of earnings, which is an improving trajectory.
What's your take on the banking and pharma sectors, as a whole?
Over last 2 decades, private sector banks have withstand volatility in interest rates and asset quality cycles and gained market share from PSU banks. Although, corporate oriented private sector banks have experienced stress in loan book in last couple of years, we believe these banks are more towards the end of stress recognition cycle. Going forward, credit cost for these banks is expected to decline and they may return to normal rate of profitability. Hence rerating is possible in case of corporate-oriented private sector banks.
Pharma as a sector has underperformed market in last few years, partly due to issues related to USFDA. However, there is huge learning curve for some these companies in terms of compliance on USFDA and we believe they are at fag-end of the problems as far as USFDA goes. We expect pace of product approval to improve going forward. India business which is bigger contributor to the profit pool for many of these companies should also start to register growth as this side of business has also faced difficulties in last few quarters' post demonetisation and implementation of GST.
You run UTI's Transportation & Logistics Fund. What are some of the most compelling reasons to invest into this fund right now?
UTI Transportation and Logistic Fund is an unique play on rising income levels and improving aspirations of Indians. Further it is also provide opportunity to invest in "Make in India" theme as large vendor base which is catering to the needs of India auto OEM have also developed capabilities to serve demand of global OEMs. The fund also invest in logistics space wherein, after GST, the business opportunities will be significant and is likely to endure over many years to come. Further, the government endeavour to reduce transportation cost and commissioning of dedicated freight corridor would improve opportunity for players involved in logistic play.
And lastly, what's the optimal asset allocation you'd advise at this stage? Many experts are predicting a harrowing degree of volatility ahead of the general elections. Would it be wise to be overweight equities at this stage, or is a more prudent approach warranted?
Equity as an asset class is volatile in nature. Last year volatility was unusually low not only in India but also globally. The way to approach this market is to follow good asset allocation strategy and not to trade on a short-term basis. Over long term, equity as an asset class has given higher return over other asset classes. My suggestion to investors is that they should seek regular advice on what should be the asset allocation and stick to that plan. This discipline will help them to achieve their long term goals.