What's your broad take on the equity and debt markets right now?We seem to be stuck in an extended, frustrating time correction of sorts…
Indian equity market has corrected from its all-time highs partly on the back of concerns on global markets and partly domestic ones. From a global market perspective concerns have arisen on account of tightening of rates by the US Fed, shrinking Fed balance sheet and newsflow on trade wars. Coming to the domestic front, imposition of long term capital gains tax, asset quality pain in the banking sector, rising oil prices and lower than expected pick-up in corporate earnings have deterred market sentiments. The markets might consolidate for some more time, given the fact that valuations are not cheap.
You manage Motilal Oswal Midcap 30 Fund. As a fund manager, are you facing challenges in identifying value picks in this space? Valuations aren't exactly cheap right now, so to speak…
We endeavor to buy high growth oriented quality businesses at a reasonable price. A good business model, long term sustainable competitive advantages, capital efficiency, structural growth drivers and competent management driving the company are some of the factors we look before we invest. Obviously, high quality and high growth companies will not trade very cheap, the valuation should be reasonable compared to the growth prospects.
What's your take on all the muck that's been raked up in the banking sector of late? IS the worst behind us, or is it just the tip of the iceberg? Are you more positive on PSU or Private Banks at this time?
We have a sound banking system in place which has been further strengthened by further reforms including the bankruptcy code. Isolated cases of fraud cannot be generalized for the entire banking system. We are relatively more positive on retail oriented banks and NBFC's which lend for consumption activity as we believe consumption is a more secular and structural growth story for India given its demographics and income levels.
Do you take cash calls within your portfolio? If yes, what's your strategy… and if no, why not?
We do not take any significant cash calls in the portfolio. Cash is low as we believe in investing in businesses for longer term rather than using it for opportunistic market timing or trading.
The mirage of earnings growth just doesn't seem to be materialising. Do you see this as a key risk to the markets going forward?
Earnings growth has been low in the past few years due to multiples reasons including macro reasons like stress in banking sector, demonetization, GST, slow pick-up in investment cycle and company specific reasons like over-leveraged balance sheet, low capacity utilisations, etc. This year we expect to end with high single digit earnings growth and from next financial year we should see double digit earnings growth. Markets have already factored in a slower pace of pick-up in earnings growth.
How do you see international factors such as crude prices and US monetary tightening affecting domestic markets in the next 12 months?
Sharp increases in oil prices can increase inflation and current account deficit. The follow up impact is on hardening of interest rates and fiscal deficit. In the past we have seen oil prices as high as 140$/bbl. In the current environment we think that oil prices till 80$/bbl will not have any major impact on the economy or the markets. Pace of interest rate hikes in the US, tightening of liquidity, global growth, oil prices and trade policies would determine the direction of equity markets.
Lastly, what should investors do right now in terms of asset allocation? Is it prudent to sit on cash with a sizeable sum of money, at least until the uncertainty about the general elections pass?
We have already seen a running correction in the markets which is healthy for equity markets as it gives an opportunity to long term investors and puts idle cash on sidelines to work.The longer term fundamentals and structural story of Indian markets still remains intact. This correction should be viewed as a buying opportunity by long term investors in the markets.