Most of Bajaj’s top rated ULIP equity funds have returned 7-9%, same as most of the liquid or short-duration funds. Do you see any equity advantage in the current market?
The returns for equity funds and debt funds have somewhat converged over a 5-year period. However, there is a time period bias in looking at a specific point-to-point period here. This doesn’t mean that going forward, the 5-year return of equity and debt funds will be similar. One way to cut out the point-to-point time period bias is to look at rolling returns. Typically, equity has been among the top performing asset classes over a longer period and also created larger wealth for investors, even though they may come with intermittent volatility/corrections.
The key equity ULIP funds have managed to beat the benchmark index and respective peer category by a healthy margin over the long term — 5-year and 10-year. Also, most of our active equity ULIP funds are rated 5-star and 4-star by Morningstar, which is an independent fund rating agency. That indicates that these funds have managed to deliver superior risk-adjusted returns over the long term.
In one of your LinkedIn blog pieces, you say “macros trades are seldom successful”. Even if the macro numbers for India improve going forward, is there no direct impact on market performance?
We believe markets are more impacted by micro factors like corporate earnings over the long term. Corporate earnings have been subdued or below expectations over the past few years. However, we are starting to see a revival in corporate earnings growth, and expect it to pick up pace from H2FY20. This will help to drive the markets going forward.
The recent cut in corporate taxes will also provide a boost to corporate earnings over time. We believe that a bottom-up research- oriented process, coupled with growth at a reasonable price (GARP) approach will help deliver superior returns over the long term.
India’s fiscal deficit, which by August-end was 80% of the budgeted estimate, is on a tightrope, given that the FM has doled out Rs 1.45 lakh-crore tax sops in September. How do you see the government balancing the deficit in case crude prices rise again?
The latest data shows that fiscal deficit for FYTD20 (up to September) stood at 93% of full year target versus 95% in the corresponding period in the previous fiscal year. Despite being lower than the corresponding period of the previous fiscal year, fiscal deficit is still elevated, primarily due to lower indirect tax collections.
The corporate tax rate cut raises some concerns of fiscal slippage. However, we feel that this stimulus is required to help revive economic growth, even at the cost of some moderate fiscal slippage this fiscal year. The government has also announced the intention of doing strategic divestment in PSUs, and this helps to counter some of the fiscal slippages.
Oil prices have softened from their highs due to global growth concerns, and increased production from the US. We do not see much of a risk from crude oil at this juncture. Softer crude prices is beneficial for India with it being a large net importer of crude, accounting for ~30% of total imports.
Since a select few stocks are driving the indices, how do you see the broader market going forward? What is required for a turnaround?
The market has been quite narrow with a handful of quality stocks pushing up the headline Nifty index. Besides that, the broader markets (small/midcaps) have significantly underperformed the Nifty index since the end of CY2017. With the correction in broader markets, the Nifty Midcap index is now trading at a healthy discount to the headline Nifty index (from a forward P/E valuation perspective), compared to a steep premium at the end of year 2017.
We are now seeing some attractive bottom-up opportunities in the mid-cap segment. With a recovery in corporate earnings and capex cycle, we also expect the broader markets to recover.
India is the most expensive market among emerging market peers. How long do you think India can sustain its rich valuation?
India has historically always traded at a premium to emerging markets, due to its stronger long-term growth potential. It will be able to retain its premium, as corporate earnings recover and economic conditions also start to turn around gradually.
Valuation is rich in certain pockets and in some of the quality stocks. If we exclude them, then valuations for the Indian markets are quite reasonable at this juncture. As mentioned before, the valuation for the broader markets have come down quite significantly.
What sectors or businesses could be the long-term bets in the market?
We have been liking private sector financials due to their relatively stronger credit growth and asset quality. Also, banks will be among the biggest beneficiaries of the corporate tax cut. We have been liking the capital goods/infrastructure sector due to the expected revival in capex cycle — led by both government spending and as well as pick-up in private capex. We believe that pharma sector has bottomed out and selective opportunities have emerged, as sector valuations have become quite reasonable. Even in the consumer sector, in spite of rich valuations, one can find few opportunities to invest for long term.
India’s business environment has changed swiftly in the last few years with RERA, GST and IBC. How do you see the way forward?
The current government has been introducing various reforms in a gradual manner since it got re-elected. Even though some of the initiatives had short-term hiccups, they are broadly good for the economy and the business environment over the long term. Most of these initiatives have been able to clean up bad loans in the system and bring in better transparency and governance within the industry.
The recent cut in corporate tax has been a bold move and one of the steepest cuts in the past 20 years. This makes India’s corporate tax rate competitive with its Asian peers, and will help to revive manufacturing and investment, which have slowed down lately. India’s Ease of Doing Business ranking (as per World Bank survey) has also improved significantly under this present government from 142nd rank in 2014 to 63rd rank in 2019.
We need continuity in reforms to help India revert back to its earlier high-growth trajectory. The need of the hour is to revive the investment /capex cycle, especially private capex. The government has been taking various steps in that direction.