Longer term growth for private banks faster?

Private banks is one space where longer term growth can be faster than industry and the banking industry itself could grow faster than the nominal GDP, believes Karthikraj Lakshmanan, senior VP and fund manager – equity at UTI Asset Management.

Besides private banks, the fund house has been overweight on the auto sector where there’s a cyclical uptick in volumes post pandemic. The other major sectors where the fund manager is seeing investment opportunities are pharmaceutical and retail. “These are some of the segments where we are positive and have good exposure in the largecap fund,” Lakshmanan said in an interview with ETMarkets. Edited excerpts:

Despite the strong rally, several money managers still see a lot of opportunities in the midcap and small cap segment. What are your thoughts?

There has been a sharp rally in mid- and smallcaps in the last 7 odd months. So, valuations have inched up for this category and, hence, risk reward is little less favourable from an immediate term perspective.

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Having said that, there have been many multibaggers which have emerged from this space in the past and likely to do so, going forward as well.

Hence, for investors with higher risk appetite, longer investment horizon of 5-10 years and patience, select mid- and smallcap names could still be good opportunities.

From an average investor perspective, if we look at last 1 or 2 decades, a significant proportion of wealth has still been created by largecap companies.

What’s your outlook for equities over the next 1 year?

We don’t have a specific outlook for equities from a 1-year perspective. We keep evaluating the current valuations versus longer term and the macro situation.

On the valuations front, while markets are expensive compared to the 10-year average, they aren’t expensive enough to be concerned about.

Within the equities space, largecaps seem still more attractive than mid- and smallcaps at this point after the mid- and smallcap outperformance in the last few months.

While global macro situation could be impacted by the higher interest rates and geopolitical situation, India seems to be on a strong footing, not just in the near term but from the next 5-10 years perspective.

We could be amongst the fastest growing in the top 10 economies due to our population demographics, favourable macro-environment and huge scope for increase in per capita income levels.

In the run-up to the general elections, will one see major rejigs in the portfolio?

The markets may be volatile closer to general elections as we have seen in the past instances and have seen varied market reactions for different outcomes. However, eventually, the market fundamentals along with continuity of reform measures and fiscal prudence matters more for the equities. Hence, the approach needs to be far more focused on long term fundamentals than rejig the portfolio for general elections or any other event when it comes to long-term investing.

Where are you seeing bottom-up opportunities in the market currently?

As we discussed, private banks is one space where longer term growth can be faster than industry and the banking industry itself could grow faster than the nominal GDP. While valuations continue to be reasonable though leverage has come down and asset quality is at its best for the entire industry.

We have been overweight on the auto sector as well where there was a cyclical uptick in volumes post covid.

Other than that, we do believe pharma as a space has decent growth and valuations continue to be reasonable. Pricing erosion situation in US generics has seen some improvement recently which is an added positive.

We have increased our exposure to information technology in 2023 as valuations have meaningfully corrected in the last couple of years through time correction and absolute stock price correction. Companies in the sector have demonstrated good corporate governance, high cash flow generation and have been distributing the same to shareholders through buybacks and dividends.

Then the retail sector provides opportunity to participate in the shift from unorganised to organised which is still at a nascent stage in many categories and could continue for longer.

These are some of the segments where we are positive and have good exposure in the largecap fund.

What’s the outlook for domestic institutional inflows in the near term? Do you see it outpacing FII flows?

In the last 2-3 years, continuous domestic inflows have cushioned against lumpy FII outflows. However, it is very difficult to predict flows, whether it is domestic or foreign and to that extent, it’s difficult to say whether domestic flows can continue to outpace FII flows.

The SIP amount over the last 5 years has steadily been inching up and is currently about $2 billion per month, providing a good steady source of inflows for the MF industry, and it seems this may continue.

But one still needs to be cautious, as there could be lumpsum outflows even by DIIs for multiple reasons resulting in volatility in the overall domestic flows.

Meanwhile, FII flows could be dependent on global markets, their emerging market views, India’s relative valuations compared to other markets and so on.

Manufacturing theme has gained a lot of attention in India, partly due to the China+1 strategy. What kind of exposure do you have towards this sector and/or what big opportunities are likely for investors?

Rather than focusing on themes, our focus is lot more on individual companies’ ability to generate superior return ratios and grow sustainably in the medium to long term, across sectors, whether manufacturing or services.

In a country with young demographics and a large workforce, with government’s incentives for domestic manufacturing and diversification efforts of global companies, India has a good opportunity on the manufacturing front.

Within this space, we have good exposure to auto and ancillaries, pharmaceuticals and select industrials, which benefit from both domestic as well as export opportunities.

Amid the prevailing global and domestic factors, what kind of asset allocation strategy can help a retail investor balance risk and returns?

From purely markets perspective, equities are slightly more expensive than the long-term average when compared to bond yields and to that extent, at the margin, the allocation maybe slightly more tilted towards fixed income than equity in the near term.

But overall equities, especially largecaps as a segment, is not really in a very expensive zone that one needs to worry a lot about.

Earnings growth expectations are in double digits which is a healthy situation. Hence, equities still look good from a mid- to long-term perspective (5-10 year time horizon).

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

Harry Byrne

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