There hasn't been much price correction in "winners", while the market has continued to punish underperformers, says Anoop Bhaskar, head-equity, UTI Mutual Fund.
In an interview with Samie Modak, he talks about the delay in earnings recovery and other key risks. Edited excerpts:
What is your reading of the market situation?
Revival in economic growth has been much slower than expected. The hope that a strong government will automatically translate into fast revival hasn't been a reality.
People are realising that we have some structural problems, which will require time.
The reduction of India Inc's debt is a much more long-drawn affair. Earnings growth has been much more muted.
Most of the earnings growth has come from reduction in costs on the raw material side, rather than volume growth.
When do you see a turnaround in the earnings?
It's like the great play 'Waiting for Godot'. We keep waiting for earnings to come and earnings keep getting deferred.
Last year, everyone said in March, earnings should come back and it turned out to be the worst quarter.
The September quarter will also get hit because of the high base impact of last year. Hopefully, it will be the third quarter, if we have good monsoons and a decent festival season. But, any green shoots on the ground are few and far in between.
So, the clarity with which one can make an assertion that the fourth quarter will be better than the third and the third quarter will be better than second that is not very evident.
We are seeing strong flows into equity schemes despite the fall.
Year-to-date returns for equity schemes are flat or marginally negative. To some extent, the faith in equities hasn't still been shaken.
As this was the first correction in this market, people generally are more confident.
The real test will come when you have another correction, deeper than the first one. If there are more months of decline, this hypothesis will be tested.
What are going to be the important triggers for the market in the near term?
If there is a special (Parliament) session for goods and services tax (GST), that can be a confidence booster.
If the Bihar election results are in favour of the Bharatiya Janata Party (BJP), it will be another positive. A lot will depend on global cues till the start of the second quarter results season in October.
The US Federal Reserve could raise rates by only 25 basis points. But, what can scare investors is that the era of easy money will be over. So, it remains to be seen how the market behaves on that.
A bigger worry is going to be China. If there another round of yuan devaluation in September or October, it will spook the emerging markets in a very big way. It could be a start of another round of currency devaluation, which means money will flow out of all emerging markets.
When do you expect a turnaround in the economy?
We are in the fourth year of an economic slowdown. Normally between the 4th and 5th year of a slowdown, the economy tends to revive.
If you go back, the economy peaked in 1997 and by 2002-03, it was on a bit of repair. If October 2011 was peak of economic activity, we are completing four years.
Logically, you are closer to a period where the economy should revive. From that point of view, it is positive for equity investors.
But, it is not clear how strong will be the recovery. The final signal of an economy bottoming out is corporate restructuring.
Unfortunately, last year's rally was very perverse. So, the corporates stopped restructuring, as they thought they could raise equity to pay off their excesses of last economic cycle.
This year, the realisation is that it is not going to happen. So an important signal to look for is whether there is great amount of corporate restructuring. Companies selling assets, divisions, plants to focus on what they think will give them high return.
What action is required from the government to boost the market?
Companies are bought for the cash flows or earnings they generate. Government policies can only help them achieve it faster.
If there is no improvement in cash flow generation, any amount of reforms can't take the market beyond a certain beyond.
So we have to focus now on companies that are better placed to participate in the next phase of growth. Cheap doesn't matter. If cheap was the criterion than everyone would be buying public sector undertakings (PSUs).
Is there value now after this steep correction?
The classical correction where all stocks are catapulted hasn't happened. The non-performers have corrected more than the performers.
For instance, Vedanta, which never participated in the upturn, but has corrected sharply. While Bajaj Finance, which participated in the upturn, hasn't participated in the downturn. So the performers have corrected just five per cent or 10 per cent whereas the overall market has corrected much more.
Most investors are still waiting for the winners to correct. One or two companies are accounting for entire growth in a sector. And, investors have loaded into companies where there is growth irrespective of valuations.
Fund houses like us, which balances growth with value, have tried to buy cheaper stocks thinking the economy recovery will come and these stocks will get re-rated. But that hasn't happened.
Is there going to be a shift in the investment strategy at UTI MF?
Growth is not going to be as liberal as we had thought. Therefore, we will also participate in some of stocks as they correct.
We will build a portfolio that balances value with growth.
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