Nivesh Mitr spoke to Shibani Sircar Kurian, Sr. VP, and Head of Equity Research, Kotak Mahindra Asset Management Company (KMAMC) on current markets and recommended investor action.
- Valuation discount of mid-caps vs large caps is now close to 10-year highs
- The economy’s deceleration trend is close to bottoming out.
- There is an opportunity in the mid and small-cap space in companies that have a sound business model and strong balance sheet and cash flows.
- Recommendation –
- Invest in Mid & Small-cap mutual funds through a staggered and disciplined investment with a long term investment horizon
- Increase asset allocation in a systemic manner on an incremental basis to multi-cap and mid-cap funds with a long term investment horizon
Nivesh Mitr (NM): What is your outlook for 2020?
Shibani Kurian (SK): As we look back, the current market cycle started in late 2013 as optimism of the first NDA win gained momentum thereby propelling the mid- and small-caps to extreme outperformance over the large caps. The sell-off since Jan’18 ensured that the significant relative outperformance of mid and small-caps has disappeared completely.
Today, the valuation discount of mid-caps vs large caps is now close to 10-year highs. From here on, for the market breadth to improve, broader economic growth outlook needs to improve. While a sharp growth recovery does not look imminent in the near term, we believe that the deceleration trend is close to bottoming out. The growth improvement in FY21, though gradual would likely be on the back of the following:
- lagged effect of fiscal policy changes (through corporate tax cuts already implemented)
- Improved transmission of monetary stimulus
- Improvement in health of financial sector balance sheets resulting in a reduction in risk aversion
- Some demand-side recovery as the structural changes undertaken start impacting demand positively
From a global perspective, central bank liquidity has been a key driver of flows. Central banks are likely to continue to follow an accommodative policy and expand balance sheet given the global growth challenges, and threats to global growth on account of the coronavirus.
The government has also recognized the need for a structural recovery in investment, which in turn could result in sustained improvement in GDP growth trajectory. The policies of the present government seek to remove supply-side bottlenecks in order to provide an environment for growth being more investment-led rather than only consumption-led. While adherence to FRBM (Fiscal Responsibility and Budget Management) is important, there is need to look at a trade-off between higher short-term vs long-term gap in infrastructure investment. One way of addressing this would be by attracting large scale FDI into Infrastructure sector. The pace of execution also needs higher attention. While it is likely that private sector capex recovery is still some time away, the pre-conditions for investment recovery include:
- Improvement in capacity utilisation levels
- Lower interest rates and the transmission of policy rate cuts along with strong bank balance sheets
- Corporate tax cuts should help provide the risk capital for growth
We expect that investment recovery likely to be led by rise in public capex spends (especially in the areas of roads, affordable housing, ports, railway and water) and strong FDI (Foreign Direct Investment).
NM: Do you expect broader markets to participate in the rally in the coming times?
SK: While narrow market movement and polarisation of stock performance has been a global phenomenon, the trend in India has been extreme since the beginning of 2018. As discussed above, for market breadth to improve and for the divergence between midcaps and large caps to narrow, broader economic growth outlook needs to improve. While a sharp V-Shaped growth recovery does not look imminent in the near term, we believe that the deceleration trend is close to bottoming out which would be supportive of the broader market movement (notwithstanding some possible near term effects of the coronavirus outbreak globally, which we are yet to ascertain). The single biggest factor that will likely drive this is an explicit pro-reform stance by policy-makers. In this respect, some of the key measures which we expect would start bearing fruit include the following:
- Corporate tax cuts
- Strategic disinvestment and privatization led reforms
- Quicker resolution of the NBFC (Non-Banking Finance Companies) challenges with NBFCs being brought under the IBC
- Large recovery under IBC (Indian Bankruptcy Code) paving the way for further recoveries from large accounts
- Transmission of policy rate cuts with banks moving to external benchmark linked lending rates for retail and SME loans
NM: What is your view on mid & small cap equities? And do you recommend a lumpsum/ staggered investment (through SIP/ STP)? If staggered, for how long it should be staggered (6 month/ 1 year)?
SK: With valuation differentials between midcaps and large caps being close to 10 year highs, from a risk-reward basis, it would appear that there is opportunity in the mid and small cap space in companies which have a sound business model and strong balance sheet and cash flows. However, as discussed above for a significant outperformance to be seen in this category, growth outlook needs to improve. With this background, we suggest, a staggered and disciplined investment into mid and small caps mutual funds with a long term investment horizon. Using the SIP/STP route to invest into funds would be a prudent investment strategy
NM: Large cap funds have seen a great rally in the last 2 years. Is it time to book profits and exit them?
SK: We recommend increasing asset allocation in a systemic manner on an incremental basis to multi-cap and mid cap funds with a long term investment horizon. The allocation across market capitalisation would however depend on the individual goals, risk appetite and asset allocation strategy.
NM: What is your recommendation to a conservative investor/ new investors with no past experience in mutual funds, with long term time horizon? Is it still good to make fresh investments in large or multi-cap equity mutual funds?
SK: While investing in equity mutual funds, it is important to remember that time IN the market is more fruitful than trying to time the market. One must adopt a disciplined and systematic approach over the long term to investing in equity mutual funds after determining one’s long term investment goals and risk appetite. The category of funds one should invest in would depend on the investment goals and the asset allocation strategy (which would differ from individual to individual). In this regard, investments through the SIP (Systematic Investment Plan) route is a prudent strategy, especially for a new investor.