Swati Kulkarni – EVP & Fund Manager – UTI AMC
Swati Kulkarni, EVP & Fund Manager – Equity at UTI AMC, feels in medium term, equity asset class is likely to give inflation-beating returns even though in the near term, equity returns may be lower than in the last 9 months owing to the valuations above the long-term average multiples.
Kulkarni, who manages about Rs 12,600 crores worth of assets, has over 2 decades of experience in capital markets. He believes ‘Time in market’ is more important than ‘timing’ the market. Not having enough allocation to equity asset class could hamper absolute wealth creation more than buying at higher valuation.
Edited excerpts:
Q) 2020 was a volatile, unpredictable year which changed how most of us live, socialize and not to forget invest. What is your outlook for the year 2021?
A) Equity markets in its classic style have honored the disciplined (SIP contributor) and rational investor who combatted the fear and pessimism (arguably may be a minority) and took advantage of the very attractive valuations during the trough of March 2020.
Equity markets have looked beyond the pandemic in 2020 and shown a remarkable comeback supported by the upward revision in economic recovery in Sept 2020 quarter and easy liquidity.
We expect a surge in earnings growth during the financial year ’22 not just because of the low base of FY ’21 but also due to cost controls, improved capital structure with reduced borrowings, lower interest costs, and benefits of operating leverage.
The uncertainties and economic adversities associated with the pandemic have compelled many companies to reimagine their business models in order to survive.
Good companies on the principle of ‘never waste any crisis to bring desired changes’ have reduced costs, strengthen the balance sheet, and are likely to thrive by gaining market share.
A large part of the cost reduction is expected to be structural leading to improved ROE and ROCE.
Macro parameters except for fiscal deficit like current account, forex reserves, inflationary expectation, and the interest rates are supportive.
The corporate and bank balance sheets have improved with capital raise and deleveraging. GST collections, high-frequency indicators are showing improvements.
The Government has pushed the structural reforms in the field of labour laws, agriculture, manufacturing and taxation which is expected to reduce the complexity, improve productivity and encourage fresh investment in manufacturing over the next 5 years.
We believe that over a medium-term equity asset class is likely to give inflation-beating returns even though in the near term equity returns may be lower than in the last 9 months owing to the valuations above the long term average multiples.
Q) The next big event which would drive the sentiment is Budget 2021 and FM has already given a teaser that it would be a vibrant one. What are your expectations from the Budget and policy measures that could cheer markets?
A) Every year the excitement or anxiety about the Budget gets discussed in Media in the run-up to the final day. Unlike in the 90s, when Budget speech used to contain policy announcements, changes in direct and indirect taxes, for the last few years major policy announcements have been made outside the Budget.
A large part of yesteryears’ indirect taxes has now subsumed in GST which is reviewed by the GST council through the year. So frankly speaking, we do not think Budget is a big event that needs any change in the investment strategy or portfolio holding.
2020 had been an exceptional year with a forced disruption to economic activity; to combat the hardships many Governments and central banks across the globe have extended support through easy fiscal and monetary policy.
In addition to the repayment sops, direct benefit to the poor, and credit guarantees against loans to MSME, important policy reforms have been announced to encourage manufacturing in India including very attractive tax rates, labour reforms, production-linked incentives for certain sectors, Agri reforms.
The fiscal deficit is bound to expand with an economic shock causing GDP decline in FY ‘21, the silver lining is that the other macro parameters like current account, forex reserves, interest rates, and inflationary expectations are in a comfortable zone.
Q) What is your advice for investors for the year 2021? Things to keep in mind while investing/trading especially for first-time investors?
A) The basics of equity investments are the same across the market cycles and apply to investing in 2021 as well.
1) Market correction could be an opportunity to allocate more to equity as valuations also correct (all other things being similar).
2) ‘Time in’ is more important than ‘timing’ the market. Not having enough allocation to equity asset class could hamper absolute wealth creation more than buying at a higher valuation
3) Trading may give a sense of staying occupied, but it cannot beat the wealth generated by staying invested in good companies for a long period.
4) Beware of the trading temptations to make quick bucks, rather look for quality investments that you can back even when the prices fall and be prepared to extend your investment horizon in case there is a deep market correction (for example March 2020)
5) Consider the MF route for the bulk of your equity investments as it is the most cost-effective, diversified, disciplined, informed, and transparent approach to create long-term wealth.
Q) What was the performance of UTI Mastershare Fund in 2020? And, do you think the risk averse investors could look at the Dividend Yield fund?
A) UTI Mastershare has beaten the benchmark S&P BSE 100 and also most of the funds in the category (has been in the top 25%) in 2020.
This large cap fund invests on the principles of Growth at a Reasonable Price and selects companies with a strong competitive franchise with either pricing power or cost competitiveness rendering them an ability to invest for growth as also handle challenging period well and gain market share from weak players.
Our experience suggests that this strategy has resulted in lower risk (beta and Standard deviation) than the underlying benchmark S& P BSE 100 and has generated superior risk-adjusted returns.
UTI Dividend Yield Fund has a mandate to invest in high dividend-yielding stocks. We have preferred to invest in companies with high dividend yield, high free cash flow yield, and those with decent earnings growth.
The Fund is market capitalization agnostic. The Fund has beaten the benchmark NSE Div. Opp. 50 Index over 1 and 3 years.
In a falling market, the dividend yield increases restricting sharp downside as expected dividend cash flow is preferred by investors.
In extreme, bull market many stocks see reduced yields, and the universe of high dividend-yielding stocks narrows which may cap upside.
So, both the funds are distinct in their investment approach and have demonstrated a lower risk than the benchmark. Investors can allocate a portion of their core holding to UTI Mastershare and the UTI Dividend Yield fund could be considered as a part of the satellite portion.
Q) Which sectors are likely to remain in focus ahead of Budget?
A) Like, in the last 4-5 years, certain expectations will get build up around sectors like real estate, housing, banks, fertilizers, and agrochemicals, etc. As mentioned earlier, we do not foresee any major portfolio changes ahead of the budget.
Q) The COVID is not over yet but vaccine news is comforting. The uncertainty is likely to linger on in the coming year as well. Which are the big risks for equity markets that investors should keep an eye on?
A) The equity markets have rallied more than 80% from the lows of March 2020. The valuation comfort that the markets had then is no longer the same although vaccine news removes the fear factor as far as dealing with this pandemic is concerned.
It is possible that the economic/earnings growth recovery expectation may already be discounted by the market. So, an investor with a very short-term investment horizon up to 1 year is taking a much higher valuation risk.
Secondly, when the equity markets are buoyant, stock prices of most companies tend to go up, investors should be cautious about the quality of the companies they own.
The quality companies that add economic value over a long period by generating consistent cash flows and compounding earnings at a higher return on capital have a lower risk of capital destruction over the long term even if one buys them at a higher valuation.
With easy monetary and fiscal policies globally, if supply normalization is delayed, there could be a risk of rising inflation, firming interest rates, and commodity prices including crude oil.
Q) FIIs have been generous when it comes to flows in 2020. Will the momentum continue in the coming year as well? Data suggests that FIIs have invested more than US$ 20 bn in Indian equities in FY20 while DII has sold more than US$ 3 bn led by redemptions in mutual funds.
A) Supportive fiscal and monetary policies resulted in ample global liquidity and ‘risk-on’ sentiment. Among the emerging markets, India is expected to remain an attractive long-term investment opportunity given the relative advantages like favourable demographics, strong domestic demand, political stability, and sustained economic growth path.
The FII ownership of Indian equity to total market cap of S & P BSE 500 has risen over the years and is much higher than the domestic institutional ownership.
As the demand starts to pick up globally the inflation and interest rates could rise, and the central banks may start to tighten policy stance at some point of time to manage inflation.
This is likely to bring volatility in the flows. However, in the last 5 years, there have been structural improvements in domestic financial savings, like regular inflows through SIP and participation of long-term players like EPFO and Pension Funds. This has been useful in improving market depth, liquidity, and in dampening the volatility.
Q) Primary markets hogged the limelight in the year 2020 with more than 16-17 mainboard issues collectively raising more than Rs 30,000 cr. What do you foresee for the year 2021, and a big issue to track?
A) The momentum in the primary market could continue given the buoyant sentiment and companies’ preference to improve the gearing ratios.
Unlisted players in logistics, infrastructure, Ad-Tech, Ed-Tech are likely to explore going public. The stated intent of the central government in last year’s budget to list the state life insurance player may see certain action.
Q) Which sectors are likely to hog the limelight in the year 2021?
A) To my mind IT, Pharmaceuticals, Healthcare services, Telecom, and Automobile look to gain limelight.
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