In Conversation with, Hardick Bora & Sanjay Bembalkar, Co-Heads of Equity, Union Asset Management Co. Pvt. Ltd.
"We Are Positive About India’s Growth Story"
What is your outlook on the Indian equity markets in the short to medium term? Which sectors according to you are well-placed for the coming three years? Also, what are the pertinent risks facing the markets in 2023?
The Indian equity market outperformed the developed world markets in 2022 despite facing headwinds on growth, volatile commodity prices and rising inflationary pressures. We believe that India is on the verge of a revival of a capital expenditure (capex) cycle and cyclical recovery in the foreseeable future. We all know that the government is keen to make India a global manufacturing hub and is making deliberate efforts by lowering tax rates and offering a Production Linked Incentives (PLI) scheme to stimulate manufacturing activity within the nation to enable India to be a part of the global supply chain. In the forthcoming period, these efforts may lead to operating leverage benefits to companies.
We are positive about India’s growth story going ahead due to favourable risk-reward which is available to Indian businesses on a global scale. Considering the premium valuations currently commanded by our markets, we believe earnings delivery will be the key lever of value accretion to investors in the medium to long term. On a sectorial basis, over the medium to long term we currently find risk-reward to be favourable in financials, consumer discretionary, consumer staples, telecommunication and industrials. We believe that these sectors are more insulated from the current global threats because they depend on variables that are local and controllable in nature.
One of the potential domestic risks that markets may encounter in the coming years is a rural slowdown caused by delayed rural recovery that may result from elevated levels of inflation or a delayed spending cycle from corporates and the government. Rural slowdown impacts the incremental growth which can accrue to companies. On the macroeconomic front, global inflation and high interest rates could cause a slowdown in the global economies, potentially impacting a section of Indian enterprises which are dependent on global economies for their growth. We are not out of the woods from a geographical risk perspective if any unintended consequences arise from such conflicts that might add to the headwinds applicable to the Indian markets.
What changes have you made in your equity funds in view of the rising interest rates and volatility over the last few months? Currently, are you more skewed towards growth or value stocks?
At Union Asset Management we follow the fair value approach to valuation. This approach is unique in its own way as we can factor in our views about rising interest rates in the valuation models and build a higher interest rate risk. At the start of the calendar year 2022, our analysis suggested that rising interest rates and inflation would be significant headwinds to the growth of the global economy. We decided to move away from sectors dependent on global economies for their growth and move towards sectors benefiting from local growth drivers. As a result, we have shifted our portfolio’s focus from export-oriented sectors like IT to domestic-oriented sectors like financials, consumer discretionary and consumer staples. Additionally, we started prioritising Large-Cap stocks over Mid-Cap and Small-Cap stocks to cushion the downside which may accrue from lowering of growth expectations in richly valued small-cap and mid-cap stocks at that time.
As a fund house, we don’t have any specific preference between growth style of investing and value style of investing. However, considering the global macroeconomic scenario, we have increased our weight in bargain stocks. These are stocks which are currently not in favour due to temporary unfavourable situations faced either by their industry or by companies, which is expected to reverse over time. At Union Asset Management, we focus on companies which are growing faster than their industry peers and which have higher efficiency than their peers. By choosing these stocks, our endeavour is to stay away from value traps. At present, our small-cap and mid-cap funds continue to remain highly oriented towards growth stocks.
With a mild recession anticipated in the US and Europe, is it sensible to exit international funds? What is your advice to retail investors who have parked their money in international funds?
We always recommend investing with a disciplined, diversified approach with focus on long-term strategic asset allocation in mind. Therefore, if investors’ long-term strategic allocation permits, they may target overseas funds from a long-term viewpoint rather than focusing on short-term volatility. However, in order to comprehend proper allocation to such asset classes, we strongly advise investors to consult with their financial advisors.
Which three major emerging investment themes do you expect to dominate over the next decade?
Given that India is one of the fastest-growing large economies in the world, we anticipate that its average per capita income growth will be strong. Considering this incremental per capita income, we expect the consumption-focused themes to do well in times to come, with the consumer discretionary sector— which includes apparel, footwear, leisure and recreation and accessories—seeing significant gains. Also, as India becomes a part of the global supply chain and a manufacturing hub, we anticipate that financials and industrials will be emerging investing themes.
As a nation, we have set targets to reduce the economy’s carbon intensity and achieve net zero carbon emissions by 2070. Therefore, in the wake of sustainable development, we see intensified investment in emerging sectors like alternative energy, renewable energy and hydrogen as a fuel. With the large economy to back energy demand and export focus, we expect this whole gamut of renewable and hydrogen-based energy sector to do well over the next decade. Alternative energy sources are being tapped vigorously and companies engaged in this sector to generate and distribute this energy are expected to do well.
What are the emerging trends you are witnessing among mutual fund investors? How should retail investors navigate the current market volatility with mutual funds?
Investors now see mutual funds as a long-term investment vehicle rather than a speculative, short-term one. The increase in the SIP book for the industry demonstrates this. The SIP book has increased steadily, reaching a record high of ₹ 13,573 crore in December 2022 from ₹ 11,305 crore in December 2021 with December 2022 being the third consecutive month where SIP contributions exceeded ₹ 13,000 crore, as per data published by the Association of Mutual Funds in India (AMFI). As investors become more aware of the value of a consistent investment through the route of SIP, we anticipate these numbers to stay resilient in 2023. We have also observed a significant proliferation of financial influencers that has contributed to the popularity of the do it yourself (DIY) investing trend among investors.
Also, there is a very healthy growth in direct investments, which means investors are increasingly considering various investment options for maximising their wealth. AMFI data indicates that a sizeable portion of direct investors hold on to their investment for less than two years. Considering that equity is a long-term asset class, investing with a time horizon of less than two years may not result in optimised wealth creation for the investors. Instead of timing the market, wealth is generated by time in the market as compounding benefits accrue over time. Investors should avoid getting caught up by the day-to-day noise in the market and follow a disciplined investment approach by focusing on the long term.