Daily Voice | These 4 sectors can give better returns as economy recovers, says Harsha Upadhyaya of Kotak AMC

November 08
09:02 2021

Harsha Upadhyaya, CIO–Equity, Kotak Mahindra Asset Management, thinks India is in the early stages of economic revival following the coronavirus-induced disruption.

Upadhyaya, who has nearly two decades of experience spread over equity research and fund management, says some cyclical sectors such as banking, industrials, cement and select manufacturing businesses can perform better as growth picks up.

In an interview to Moneycontrol, Upadhyaya says in Samvat 2078, investors should focus on asset allocation, disciplined investing and long-term horizon. Edited excerpts:

Samvat 2078 has just begun. What will you tell investors in the current market scenario?

To make money in equities over the long term, one needs to control greed and fear both. Our investment advice would be to focus on asset allocation, disciplined investing and a long-term investment horizon. Volatility is inherent to equity markets and is unpredictable in the short term. However, long-term investors, across markets and market cycles, have generally made better returns.

A regular and disciplined investing overcomes the ill effects of market volatility, especially at current levels of valuations after a sharp increase over the last year, investors are advised not to chase momentum and extrapolate returns of the past year going forward. However, investors with a long-term focus can continue to invest/ hold on to equities.

How should one allocate Rs 10 lakh in a portfolio?

There is never a ‘one size fits all’ solution in investing. It should be ideally based on one’s risk tolerance and return expectations. Our general advice at this point of time has been to remain neutral with allocation to equities, with underweight on mid or small-cap segment and overweight on the largecap segment.

Which are the risk factors that can spoil the sentiment, especially when the market is looking forward to strong economic and corporate earnings growth?

We are likely to witness major global central banks reversing/ pausing easy liquidity and the low-interest-rate regime that we have seen pretty much consistently post-GFC (global financial crisis). This will be the biggest risk for equities, which have benefitted from low interest rates and easy liquidity conditions resulting in higher valuations until now.

Apart from this, a sustained increase in commodity prices is also a worry due to its adverse impact on corporate profitability and inflation.

Which are the sectors that have to be in a portfolio to create a good amount of wealth over the next couple of years?

Since the past few quarters, our focus has been incrementally moving towards sectors that are closely linked with economic revival.

While we have exposure to both defensive and cyclical sectors in the portfolios, we believe the room for positive earnings surprises in defensive sectors such as IT and FMCG are limited. The valuations in these sectors are also at elevated levels.

Therefore, incrementally we believe some of the cyclical sectors such as banking, industrials, cement and select manufacturing businesses can potentially offer better stock performance with expected revival in economic growth.

For the first time, systematic investment plan flow crossed the Rs 10,000 crore-mark in September. Do you think the SIP flow can cross Rs 20,000-crore in a month in the coming year?

Over the last several years, SIPs have been gaining prominence as investors have started to realise the benefits of regular and disciplined investing with a long-term focus. Monthly input numbers have grown almost 3x in the last five years. Except for a brief period during the first wave of Covid disruption, the monthly input values have been witnessing consistent month-on-month growth.

There are over 4.5 crore SIP accounts in the industry. In the backdrop of expected economic recovery and under-penetration of equities/ SIPS, this augurs well for continuation of healthy growth in SIP penetration in the country even going forward.

Do you think after the LIC IPO, which is expected in Q4FY22, the primary market will slow down?

Primary market activity is driven by overall sentiment towards equity investing, the strength of liquidity flow, state of the economy and valuations of companies at the IPO issuance stage. If these factors remain supportive, one can expect the IPO market to be vibrant.

Do you believe that we are in a multi-year bull run and a multi-year growth story?

We believe that we are in the early stages of an economic revival post-Covid disruption. This time around, Indian corporates, by and large, have entered the new cycle with much better financial strength after significant deleveraging seen in the last few quarters. We expect reasonably strong earnings growth over the next two to three years.

The corporate profitability cycle, as measured by the ratio of aggregate profits of listed companies to overall GDP, is also improving. While the valuations have remained high and can lead to higher volatility as we go forward, we can still expect good returns for long-term equity investors.

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