Q . The markets have rallied in recent months in spite of the economic revival being slow. A lot of investors are finding this difficult to fathom. What are your views on the same?

Answer : When viewed from a domestic perspective Its only natural that current rally & its divergence versus domestic fundamentals can be a bit confusing. But we should remember that there has been a meaningful macro improvement globally especially the developed world and domestically too certain sectors like IT, Telecom, Pharma etc have witnessed reasonable turnaround. In the recent few weeks as the country has been unlocking we have witnessed green-shoots of economic recovery. For instance we have seen positive YoY growth in areas like GST collections, Manufacturing PMI, Railway Freight, Power Demand, Exports etc. So in way it can be argued that markets have pre-empted the recovery possibilities from a near term perspective, which is usually visible with a lag.

Also an interesting evaluation strategy is being considered globally, where analysts are comparing market on ‘Market cap to money supply’ basis. Indian market doesn’t look expensive on that basis. So versus low global interest rates and surplus global and local money supply, market valuations appear reasonable, especially the broader markets which have largely underperformed.

Q . What changes have you made in your flag-ship funds in lieu of the disruption caused by the pandemic? Can you share any underlying thoughts on sectors and market segments behind these changes?

Answer : Given the pandemic backdrop and its likely impact on demand across multiple segments we have attempted to create a more balanced portfolio positioning – good blend of secular & growth themes. Accordingly, we increased allocations to themes where demand visibility is least impacted like healthcare, domestic consumption, software, power utilities, rural/agriculture related plays etc. We also increased weights to beneficiaries of potential consolidation in most impacted themes where the market leaders can gain significant market share on normalization due to weakened competition, for instance Large Banks, Telecom-services, Auto Ancillaries. The focus is to own leaders with lower leverage & lesser working capital requirements

Overall the focus has been to increase allocations to secular businesses while maintaining allocation to quality businesses which despite the near-term impact can rebound faster and are available at reasonable valuations.

Q . There has been a rally in mid and small-cap stocks. What is your outlook on these market segments and how are you playing them?

Answer : We believe there is good case of market broad-basing over the next few years and Mid-Small cap segments appear well placed to benefit from the same. The overall valuations still appear reasonable compared to large caps despite the strong performance over last few months. Consolidation is an important theme where top players are gaining more market share. The listed Mid & Small cap names are also among the top players within their respective areas. We are focused on opportunities across themes like Auto Ancillaries, Cement, Technology, Industrials, Localization & shift of business from China which can potentially outperformance over the next 4 – 5 years.

Q . The SEBI has issued new norms for risk category classification for all funds. Can you please explain how this benefits the investors and how it will impact equity funds in brief?

Answer : Enhancing investor awareness has been a constant endeavour of the regulator and the new risk categorization will provide more detailed understanding on the product risk profile. The new norms incorporate a comprehensive product labelling evaluation based on multiple parameters like Credit risk, Interest rate risk, Liquidity risk for Debt funds while for Equity funds risk value will be determined based on Market Capitalization, Volatility & Impact cost (Liquidity measure). Further these measures will be evaluated on a monthly basis. Accordingly, investors will be able to take more informed investment decisions. From a perspective of fund management most of these risk parameters are analysed as part of our internal risk management process & fund framework, hence we don’t anticipate any significant changes.

Q . What is your outlook on the economic and macro-economic front? When can we expect the economic growth and corporate earnings to come back to normal?

Answer : We remain optimistic on economic revival over the medium supported by key drivers like lower interest rates, liquidity, lower commodity prices, along with a likely improvement in global growth boosted by stimulus measures. Focus on localization, potential outsourcing opportunities can further contribute to boost economic activity. Competitive intensity has turned favorable in many sectors. Leaders across segments (even Mid/Small cap space) with stronger balance sheet are set to gain market share. Corporate profits are likely to do much better than GDP growth in a foreseeable future. The broader market appears to be more attractive at the current juncture. It can provide a 3 to 5 year earnings upcycle especially considering that we have witnessed more than 7- 8 years of earning downcycle.

Q . What expectations should investors have from equity funds going forward? What is the risk-reward trade-off they looking at?

Answer : Near term challenges notwithstanding equities can be amongst better performing asset classes over the medium term. Usually markets follows earnings and as mentioned above following the weak earnings cycle for most part of the last decade, Corporate earnings can potentially outpace GDP growth over the next few years. We believe broader markets are better placed on a risk reward basis and as earnings breadth improves, broader markets should outperform.

Given the strong rally in the recent few months a near term consolidation cannot be ruled out. Further valuations in few segments are already reflecting the anticipated earning possibilities and appear to be in higher valuation zone. Uncertainty over timeline for a credible vaccine discovery, geo-political tensions, higher crude prices etc are some key risks which needs to be monitored.

However, we still believe sharp divergence over last few years, lower earnings have created a favorable base and this coupled with lower rates & high liquidity can drive the markets. Diversified funds with focus on broader markets across Multi, Mid & Small cap stocks can be considered by investors with appropriate risk appetite

Disclaimer : The information herein above is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsors, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (‘entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material, shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.