'Investors should trim expectations from equities'

'We would advise investors to invest in a disciplined way in equities for the long term.'

"Staggered investments through SIPs or STPs would remain the best ways to invest in equities," Neelesh Surana, chief investment officer, Mirae Asset Investment Managers (India), tells Chirag Madia/Business Standard.

Indian equities gave around 24 per cent returns in 2021. Should investors expect similar kinds of returns as we enter 2022?

Investors should trim their expectations and instead commit to a long-term time frame to circumvent disappointment.

Equity-market returns are functions of earnings growth, valuation, interest rate, and flows.

We believe that the corporate earnings growth will continue to remain robust, driven by cyclical and structural factors.

Indian equities had seen some correction in December. Will there be further corrections in the months ahead, given the Omicron worries, expected rate hikes, and liquidity tightening?

The Omicron variant remains a key near-term risk.

However, evidence suggests that the impact will be limited, given the severity of infection is milder and the pace of vaccination stronger.

Despite rate hikes, interest cost will remain low.

From 2014, repo rates are lower by 400 basis points, or bps (and 250 bps from 2019).

Even if rates were to increase 75-100 bps over the medium term, the cost of capital is likely to remain low.

With regard to liquidity, we believe it will remain in surplus, albeit the extent of surplus will reduce.

After the recent correction, have valuations of Indian equities turned attractive?

Valuations must be seen through a prism of growth potential and low cost of capital.

Given the ongoing trajectory of strong earnings growth across sectors, and the resultant improvement in return on equity (RoE), we believe valuations are reasonable.

The Nifty is currently trading at 17x its 2023-2024 (FY24) earnings in the backdrop of an earnings compound annual growth rate of 22 per cent over 2019-2020 through FY24, and the low cost of capital.

Which factors can drive the markets?

Confidence in the ongoing earnings recovery will be the most important factor for the markets.

We have seen reversal in the earnings upgrade cycle after seven years of consensus downgrades.

India has entered a period of economic uptrend, driven by cyclical and structural factors.

Some of the reasons for the strong earnings trajectory are stable macros and revival in the housing segment.

Also, improved outlook of the banking sector, formalisation, and consolidation across multiple businesses have made strong companies stronger.

Improved outlook for the information technology sector bodes well for demand for consumer discretionary.

Finally, renewed thrust on the manufacturing sector and deleveraging of the corporate balance sheet with debt-to-equity ratio reduced from 1x to 0.6x over the past six years.

Overall, we believe that corporate profitability and RoE have revived and will improve further.

Markets will be looking at the Budget session. Do you anticipate any big-bang announcements? What could be the focus areas?

Most taxation issues are now dealt with outside the Budget.

Overall, the thrust will be on improvement in transparency and addressing issues critical to having the economy grow at its full potential.

We will expect fiscal targets to be met on account of additional revenue of around Rs 2.5 trillion, compared to the Budget Estimates, on account of strong tax collection, which will help offset higher-than-budgeted spending on subsidies and lower disinvestment.

The government capital expenditure allocations are expected to remain high in the forthcoming Budget.

What are the major events to watch out for in 2022?

In the immediate term, the impact of the Omicron variant remains a key monitorable.

US inflation and pace of the Fed tightening will be important events in 2022.

On the political front, the outcome of the Uttar Pradesh election will be like a semi-final before the national elections in 2024.

On the positive side, the likely inclusion of India in the global bond indices could fundamentally change the dynamics of fixed-income markets and have far-reaching positive implications.

What are your sector preferences at the moment? Which sectors are you staying away from?

We are positive on long-term structural opportunities in under-penetrated businesses like financials, health care, life insurance, consumer discretionary, etc.

We are cautious on stocks where valuations have run ahead of fundamentals.

Mirae Asset Large Cap Fund and Mirae Asset Emerging Bluechip Fund have assets of more than Rs 20,000 crore. Is size becoming a concern?

We are cognisant of capacity constraints and have accordingly taken action to mitigate the challenges.

To illustrate an example, in Mirae Asset Emerging Bluechip Fund, we have curtailed the lump sum investment since 2016.

It now has an industry-leading monthly systematic investment plan (SIP) book of Rs 340 crore (Rs 3.4 billion).

Given the nature of SIP flows, these are steady and predictable.

The Mirae Asset Large Cap Fund mandate -- like any other fund in the category -- is to invest 80 per cent-plus in the top 100 companies.

The set of the same 100 companies have higher liquidity, and our analysis suggests that in the large-cap space, the difference in returns is more by stock selection, rather than the constraints of liquidity.

What strategy should investors adopt at this point in time?

India has strong and sustainable drivers for secular growth, and thus, the view on equities is constructive.

In this context, we would advise investors not to time the market and invest in a disciplined way in equities for the long term, within their earmarked asset allocation (based on one's risk profile).

Given the likelihood of volatility, staggered investments through SIPs or systematic transfer plans would remain the best ways to invest in equities.

Feature Presentation: Aslam Hunani/Rediff.com