India’s Equity MF AUM is 5 per cent of GDP compared to world average of 35 per cent, but with rising awareness, ease of transacting and reaping of benefits, these are strong signs of a structural increase in MF penetration in India, Alok Agarwal, Senior Fund Manager-Equity PGIM India Mutual Fund said in an interview with Zeebiz’s Kshitij Anand.

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Alok has over 15 years of industry experience. In his last assignment, he was Portfolio Manager - Equity at Deutsche AMC and Portfolio Manager - Equity at Deutsche Bank. Prior to that Alok was Head - PMS at K.R. Choksey Securities. He has also authored a few books on Financial Management.

Edited excerpts: -

Q) Equity market will likely close the year with gains of over 20% despite first half of December, being volatile? How do you see market trading in 2022?

A) Foreign Institutional Investors (FIIs) have been net sellers at $4.4bn over the last 2 months, while Domestic Institutional Investors (DIIs) net bought over $7bn in the same period. Despite volatility, markets are up so far in December too.

The Indian economy has shown strong resilience from the jolt of the 2nd wave of COVID. A large part of market returns in the last 21-months was likely due to unprecedented liquidity and record low rates.

Next year, we are likely to see market returns to be more driven by earnings than valuation expansion. Going into 2022, we are positive on the market in general but sceptical about rich valuations in select pockets.

Q) The November MF data is encouraging as SIP tops Rs 11000 cr despite benchmark indices closing lower. What is your take on the kind of money pouring in from MFs?

A) Rising SIP numbers and overall positive flows for equities for 9-straight months bode well for the markets. It also highlights positive investor sentiment.

However, the larger picture is about financialization of savings and the rising penetration of Mutual Funds. India’s Equity MF AUM is 5 per cent of GDP compared to the world average of 35 per cent.

With rising awareness, ease of transacting, and reaping of benefits, these are strong signs of a structural increase in MF penetration in India.

Q) Which sectors are likely to hog the limelight in 2022 and why?

A) A closer look at earnings estimates shows that incremental growth in net profits is likely to come from –

(1) domestic consumption sectors linked to recovery in the economy,
(2) banks, given improved economic outlook and
(3) global commodity sectors
(4) Digitization – as most people/businesses are wanting to take their business digital
(5) Industrials – Public CAPEX has picked up, but with most sectors getting close to 75% capacity utilization mark, private capex could be round the corner.
(6) Healthcare – With rising awareness after the Covid, the per-capita spending on healthcare is likely to go up. Also, India is a major supplier for lot of medicines across the value chain.

Q) The year 2022 will put the Budget back in focus. What are your expectations from Budget 2022? Any particular reform which investors’ are eyeing from market and economic perspective?

A) The post-Covid growth recovery is expected to continue in FY23 with real GDP growth estimates of 8.5%, on top of the 9.5% in FY22.

CPI inflation continues to be within the RBI comfort zone. But the wholesale inflation rate in India rose to a 23-year high of 14.2% in November 2021. This was the 8th straight month of double-digit WPI inflation – for the first time in 23 years. RBI’s stance is anchored on CPI inflation.

Infrastructure push could be the key macro theme of the FY23 Union budget. The government is expected to meet its fiscal deficit target. For FY23, a modest reduction in fiscal deficit would be welcome.

Elections in India’s largest state of Uttar Pradesh and four other states over the next few months could have a bearing on public perception on economic matters/reforms.

Q) We are at the close of the year 2021 and markets valuations are not cheap anymore. A lot of global investment banks have also highlighted about expensive valuations after the recent rally. How do you see that playing out in 2022?

A) The Nifty50 is trading at a one-year forward P/E ratio of 21.7x – a 30% premium to a 10-yr median of 16.7x. Markets continue to be expensive.

However, it must also be seen in the context of valuations of the alternate asset classes. G-Sec 1 yr yields are at 4.4% - which converts into a P/E ratio of 22.7x.

Hence, although equity valuations are expensive compared to historical averages, yet they are cheaper than bond valuations. Historically, markets have sustained buoyancy when their valuations were lower than bond valuations.

With rates looking set to rise in 2022, there is limited scope for valuations to expand from here. Hence, the bulk of market returns are likely to be earnings-led.

Q) We saw over 50 main board IPOs so far in the year 2021, compared to 14 in 2020. What is the trend that you see for the next year?

A) Indian start-ups have been on a fundraising roll, driven by venture capitalists.

India saw the birth of 42 unicorns in 2021, compared to a total of 30 till the end-2020. It brings India’s total unicorn count to 72, the third most after the United States and China.

Indian companies have raised a record $15bn via IPOs this year. Earlier, firms needed to show several years of profits before listing. But, with some changes in rules, Indian start-ups found their way into the listed universe.

The juggernaut was working fine until a couple of recent large IPOs failed – one had a poor run after listing, the other was not fully subscribed.

As we enter 2022, we have the risk of rate hikes and valuations. However, the Indian market has deepened for all start-ups and the outlook is bright for the long term.

Q) Do you see more of tech-based businesses making their way into equity markets? And which all other sectors could be in focus and prominent companies that could be in limelight?

A) India’s tech and finance start-up scene grew rapidly over the past decade. 2021 became a breakout fundraising year, due to China’s corporate regulatory curbs that are prompting some investors to pivot to different geographies.

China is still well ahead in venture capital funding. But for the first time, India surpassed China in venture capital funding growth during the first three quarters of the 2021 calendar year.

Venture capital investors invested `US$20 billion into Indian companies during the first nine months of 2021, up ~150% from the same period in the previous year.

This compares with ~100% growth in China where capital investments increased to US$67 billion. Digitization, Capex (Industrials, Materials), Healthcare, and Real Estate could be in focus next year.

Q) What are your views on the small & midcaps? Do you foresee a year of consolidation in the broader market after the recent rally?

A) Small and midcaps have done exceedingly well in the last couple of years. They have areas of opportunities as well as pockets of excessive valuations.

Select names are likely to continue creating wealth for investors. However, in general, they usually behave like high beta category.

Rather than taking a call on whether they would consolidate or not, I would look at select strong companies with visible growth, quality management and strong balance sheet.

Q) Govt plans to go big on the Semiconductor business. Which sectors are likely to reap the benefit?

A) Amidst the global chip shortage, India announced INR 760 bn worth of incentives to boost domestic semiconductor manufacturing. The government would provide PLI incentives for 6 years, with an aim to develop a complete ecosystem of chip manufacturing.

The shortage has led to intermittent production shutdowns. India has been trying to woo chipmakers to set up shop in the country for nearly two-decade but this is the first time it has offered an incentive.

This would be positive for sectors like phone makers, Electronic appliance makers, Automobiles, and companies that manufacture these chips.

Q) What is your take on FII outflows? What are they most worried about?

A) FIIs have net sold $4.4bn in the last 2 months. In the Dec’21 quarter so far, they have net sold $3.7bn in India, whereas they were net buyers in few other economies like Brazil ($3.5bn), S.Korea ($1.5bn), and Indonesia ($0.8bn).

Not many countries saw the kind of outflows seen in India in this quarter. However, the reverse is true for the rest of the year. Effectively, after a big up-move this year, these outflows could also be attributed to profit booking by FIIs.

Their key worries are expectations of rate hikes given multi-decade high inflation amidst almost all time low real rates. With respect to India, they are additionally worried about record valuation premium v/s historically and peers.

Q) Which factors should taxpayers keep in mind while investing in ELSS funds?

A) ELSS funds or tax savings funds are essentially Flexi-cap / multi-cap funds, but they come with a lock-in of 3 years (if one wants to avail the tax benefit).

Investors need to ascertain the amount they can invest in the fund for the purpose of tax savings. However, while selecting the funds, one needs to invest in funds with strong portfolios and an investment team. For more specific assistance, one needs to consult their financial / investment advisor.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)