Investment In Equities Has To Be Done With At Least 3-5-year View

Rajnish Narula, CEO - Canara Robeco Mutual Fund speaks to BW Businessworld on markets, GST, the Union Budget and his AMC's plans for 2017.

Do you believe that valuations are, by and large, stretched at this stage? What sort of asset allocation would you recommend to a moderate risk investor with a 3 to the 5-year horizon?
While the stock markets have seen a lot of volatility over the past few months, they have been trading in a broad range since January 2016. Stock markets have a direct correlation to earnings growth. As earnings growth momentum rises, stock markets valuations tend to move up. Over the last 2 years, earnings growth has been in single digits, which is broadly why markets have been stuck in a range. As economic activity picks up, capacity utilisation goes up, earnings will also start to move up. At present, market is trading at around 17x FY18E earnings. This is a slight premium over the long-term average P/E multiple of ~ 15. The historical high P/E of the stock market is ~ 24x and the low is ~8x.*

After 3 years of consolidation, earnings growth is likely to come back in FY 18 and gain momentum from FY 19 onwards. Hence from a slightly longer term perspective, markets are trading at reasonable levels. We believe that equity markets would be the best asset class to invest over the next 3 to 5 years. The current equity holdings of the Indian investor are about 6 - 7 per cent^ of the overall savings. This is substantially low, given that Equities historically have generated a return of 15 per cent CAGR over the past 15 years. While asset allocation would vary from individual to individual based on their risk profile, equities should form anywhere from 25 per cent to 70 per cent of one's total financial asset allocation.

How do you see the impact of GST and demonetisation playing out over the medium to long term?
The impact of demonetisation is likely to last till around the end of Q4FY17. Our interactions with various corporates indicate that the effect is likely to be temporary and as the cash availability improves, which has already started to happen, things will start normalising. In terms of GST, the impact could be for at least one quarter post implementation given the substantial changes that the entire value chain will have to make as they transit towards the GST regime. This is again likely to be a temporary disruption, however from the stock market point of view, this may not be as significant as demonetisation, which was an unknown event.

Do you feel that the recent budget has done anything significant to boost the capital markets? Could it have done more?
The FY17-18 Budget was primarily geared towards the rural and agriculture sector. A significant thrust has been given to the capital investment program which can result in a multiplier effect on the economy. The clear road map in terms of fiscal deficit will give enough elbow room to the RBI towards lowering interest rates on a long term basis. This should improve the prospects for both equity and debt markets. Overall, the budget can be termed as growth oriented with a clear focus on fiscal prudence. From the capital market's perspective, there were apprehensions going into the budget that the long-term capital gains tax legislations could be altered which could increase the tax incidence on investors. However, this did not materialise and markets were quite relieved by this. Structurally, India continues to remain in a bull market and the FY 2017-18 Budget only reinforces our stand.

Some AMC's are closing off fresh subscriptions into their small and mid cap funds. Do you feel that value has evaporated in that space? What should investors do now?
We believe that opportunities in equity markets are available across the market cap spectrum. Just like we allocate funds between equity, fixed income and other asset classes based on the investor's risk - return matrix, investment between Large Cap and Mid caps is largely an asset allocation call. Typically, Large Caps outperform mid-caps during bear markets, while the reverse is true during bull markets. While, both Large, Caps and Mid Caps are expected to do well over the next 3 to 5 years, mid caps may outperform large caps given the various differentiated opportunities that are available within the mid-cap space. However, the asset allocation between large and mid caps should be determined based on the investor's risk-return profile and it is very important to stick to this discipline and not deviate from it based on short-term market movements.

What should lump sum investors do now? Is it wise to invest lump sums into equity MF's at this stage?
Investment in equities has to be done with at least a 3 to 5-year view. Despite improving fundamentals of the Indian economy, markets are likely to remain volatile. Further, while market valuations are not expensive, they are not cheap either. As mentioned earlier, equity markets in India are in a structural bull run. Hence, lump sum investors should take advantage of the high volatility in markets and invest into equities at every decline and increase their equity allocation.

As an AMC, what are some of the investor education initiatives planned by Canara Robeco in 2017?
We will continue to expand the activities and initiatives that we have been conducting under SmarTomorrows - an Investor Awareness Initiative that was started by Canara Robeco MF in late 2014. This was envisaged as a series of activities and communication initiatives aimed at propagating the concept of Mutual Funds Investing to the Indian investors in a simple and coherent manner. The smarTomorrows campaign endeavours to highlight fundamentals around investing and the various opportunities that Mutual Funds provide towards ensuring a financially secure future. In the first phase of the campaign - smarTomorrows brought forth some simple fundamental thoughts on investing related to analogies around human relationships. The aim was to highlight simple yet critical aspects of MF investing like thinking long term, need for identifying financial goals and importance of periodic portfolio review process & benefits of using a financial advisor. In the current on-going phase we will be focussing on advantages of various categories of funds and expand the IE initiative to touch number of locations across India & also expand smarTomorrows as a financial literacy programme to reach out to school children

Are you planning any NFO's this year?
On the product side while the focus will continue on our existing bouquet we do plan to expand this through the launch of some International Feeder funds as well as India focused Solutions oriented constructs mainly on the Retirement Solutions side. At some juncture we will also explore launch of niche investment constructs based on strengths of our JV partner and shareholder - Robeco' s expertise, as an 85-year-old pure Asset Management Company.