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Retail Investors Should Take Exposure To Midcap Stocks Through Mutual Fund Route: Ankit Jain, Mirae Asset Global Investments

In an interview with BW Businessworld, Ankit Jain, Fund Manager, Mirae Asset Global Investments (India), talks about Consumption led funds, lending rates and more

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Consumption led funds have struggled to outperform the markets over the past year, and most of them have lagged even their benchmark indices… do you see this trend continuing or is a turnaround in store?
Yes, consumption index has significantly underperformed broader market in the last 1 year (Nifty Consumption index is down -6.6% Vs BSE200 is up +0.9% over last 1 year, though over 5 year timeframe this index has outperformed BSE-200 index by around +50bps CAGR). Underperformance is starker in last 3-6 months on account of broad based demand slowdown visible across most of the consumption category. First sign of that was started from automobiles around 6-7 months back when we started seeing significant volume slowdown across different automobile segments. Now we are seeing this trend percolating in other segments like FMCG, retail and consumer discretionary segment etc. all of these categories has got a volume push post GST implementation as most of them saw GST rate cut which pushed demand and also they have gained quite a lot of market share and footfalls from unorganized sector. We believe Q4FY19 results are showing true underlying demand trend because of LTL base for comparison.

How do you read the disappointing auto sales numbers? Despite lending rates not being high, sales have de-grown. Is this a concern?
The recent slowdown in the auto industry is a border reflection of the slowdown in the economy over the last 1 year. The tight liquidity, decline in demand from first time buyers, Increase in the insurance cost (particularly bad impact on 2Wheelers) were the major factors which resulted in auto slowdown. The impact of liquidity has still not abated completely, although the RBI has cut benchmark rates but the transmission of this to the system has still not happened because of the current situation with NBFC’s. While near term demand outlook remains uncertain on the wake of imminent price hike because of change in emission norm and safety norms. Though, we remain positive from medium term on account of relatively lower penetration and growth in India GDP.

Many FMCG stocks like Nestle, Dabur, HUL, UB are quoting at astronomically high P/E ratios right now. Is this not a concern for you while you build positions into them?

Most of the FMCG stocks was trading at historically high valuations (+2-2.5 standard deviation above last 5 year average) until 3 months back, which has now corrected towards +1-1.5 standard deviation on the back of earnings downgrades. While we see near term demand uncertainty, long term outlook and earnings visibility in the sector remains intact. Good part is earnings expectations have come down reasonably after Q4FY19 earnings.

How do you see the consumer durables market shaping up over the next year or two?

Consumer durable/discretionary space is a secular volume growth story on account of low penetration, urbanization and rising income levels. Apart from volumes, there is also huge scope of interesting premiumisation story to pain out on account of rising consumer aspirations and availability of easy finance

With SEBI restricting the universe of mid cap stocks to just 100, do you not feel that alpha generation potential will be curtailed. Also, inflows into midcaps may increase through the MF route as they could offer higher payouts to distributors post SEBI’s TER reductions. Are you not concerned that this could give rise to liquidity driven bubble valuations within these 100-200 stocks by market capitalisation?

As per SEBI definition, mid cap universe consists of 150 stocks between 101-250th company by market capitalization. Yes the constraint universe of 150 stocks could lead to short term valuation mis pricings, but in the long term, valuations converge with growth in earnings and that should continue. Midcap Funds have to invest atleast 65% in Midcap stocks but they have flexibility to invest upto 35% in either large caps or small caps based on the assessment of market valuations, growth potential and other factors. This flexibility will have the portfolio manager to construct an optimal portfolio. We are in the camp that believe there is still good potential to generate alpha, if you choose the right stocks and hold them for long periods of time. Inflows in any category or fund in the long term is dependent on the performance of the fund and growth potential of the category. We believe retail investors should take exposure to midcap stocks through mutual fund route, rather than directly investing in stocks.

What’s your broad take on the markets right now? The NIFTY quotes at 28-29X earnings and we’ve been stuck in a narrow back for almost 18 months. What’s your prognosis? Do you see a rally happening in the absence of robust earnings growth from here on?

Short term volatility in the market is driven by event based noise and is difficult to predict. Though, we believe that long term fundamental structural growth drivers are intact. Also, broader market valuations are reasonable across size, quality and sectoral parameters. Presently, markets are reasonably valued at around 19x FY20E earnings. Also, we are coming out of low base of earnings compared to long term average and hence trailing PE looks high. Overall, outlook for the market remains positive with a long term horizon.

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