What is your assessment of the current pull-back in the market?
There were a lot of excesses in the market between 2013 and the first half of 2018. There was wide divergence between earnings growth and market prices. The euphoria was built around changes in government policy and long-lasting benign interest rates. This was reflected more in mid- and small-caps. Now, given that interest rates are inching up, crude oil prices are rising, the global economy seems to be slowing down and the uncertainty around elections, the divergence is correcting. The market is now looking more closely at valuations rather than projected earnings in future.
How is the earnings trajectory likely to shape up?
I think there is a clear trend of improvement in micros. Earnings trajectory is improving gradually and unlike the last few years where we had single digit earnings growth, this year we should have double digit growth. However, earnings might still be lower than consensus estimates though it might not undershoot estimates to the extent it happened in the last couple of years.
Are the liquidity concerns overblown?
I don’t think this is India’s Lehman moment. The government will not let it happen and will solve this. There are two kinds of problems: ones which you haven’t seen before and others which you have seen before and have a templated solution for. To my mind, the liquidity issue is a problem for which we have a templated solution. To that extent, I think this situation will reverse. This is not an issue which will drag down the entire economy. A lot of it is overblown. A section of the market is in panic mode and overestimating the problem. I don’t think things are as bad as some are making them out to be. There is a lot of fear.
Do you see any clear opportunities after the recent correction?
If you have a 2-3 year view, my belief is one can make a lot of money in a lot of stocks. There are several stocks, particularly in the financials space, prices of which have fallen by more than half. Prices have corrected meaningfully in NBFCs stocks. There is a huge space within which these players operate. Most private banks are unable to reach the segment to which these NBFCs provide credit, as they are either uninterested or it doesn’t fit within their cost framework. Yes, there could be a slowdown in the coming few months and harsher capital requirements may become a reality. However, eventually these NBFCs will do well.
There are two issues: stress on the credit quality and on financial leverage. The financial leverage part is easier to solve as this is part of a cycle and will go away in the next 3-6 months. The bigger challenge comes when you start seeing pressure on asset quality. At this point of time, it doesn’t look like we will see asset quality issues especially on the retail side. There appears to be a lot of fear in the market. But investors with a 3-year horizon are now getting stocks at less than half their earlier valuation. That is a big opportunity.
The consumer sector according to me is still super expensive. There are no clear cut trends in pharma and IT that suggest the entire pack will do well. There are specific opportunities in these segments. At some point, the infrastructure segment may be worth looking at given the valuations.
What do you make of the cut in the cost structure of mutual funds?
One must realise that there is a big passive management industry, which is far less costly than actively managed strategies. In India, active management is still very dominant because active funds have delivered substantially better returns. But over the last 6-12 months, fund managers have struggled to beat indices and that will continue for the next 3-6 months. In this environment, if you are very aggressive in terms of price, there could be a big shift towards passive at some point of time.
To that extent, the industry needs to focus on bringing costs down - both fund management costs and distribution costs. Both need to head lower than where they are over a period of time so that the difference between active and passive is not too big. To that extent, the fees coming off is not a bad thing. It will force the industry and distributors to be a lot more lean and efficient.
Is the switch to an all-trail commission model healthy for the industry?
It makes life easier for AMCs. It helps match the cash flows a lot better. Over a longer term it also makes lot of sense for distributors. If you are a distributor with a heavy upfront fee structure, the willingness to churn is much higher than for someone under the all-trail model. It is hard work for the first 3-4 years, but once you cross that initial hurdle, it is going to be lot more beneficial.
What is the future for closed-ended funds?
My personal view is that unless there is a very specific strategy requirement, it is better to run open-ended funds. I expect you will see a lot more closed-ended funds in the alternate investment funds (AIF) segment than in mutual funds. Frankly, I don’t feel it really matters for a retail investor what differentiated strategies the mutual fund is following.