Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
 
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When will we get a correction?

Blogs Blog Details

Mr. Aashish Somaiyaa

Managing Director and CEO

Dear Investors and my dear Advisor friends,

At a recent business partner conference organised by our parent company – Motilal Oswal Securities – I was moderating a panel discussion with highly respected CIOs of the asset management industry. One of the CIOs asked the audience full of distributors, investment advisors, equity traders and consultants this question: “How many of your clients are waiting for a correction so that they may invest”? In an audience of about 700 people, almost everyone raised their hand – some with their arm extended enthusiastically, some with their arm half raised the way most audiences do and some with their elbow firmly grounded on the table – but yes everyone seems to be waiting for a correction to invest. I can imagine that 700 business partners managing a few thousands clients may not be sample enough for me to draw any conclusion, but you could substantiate my observation further by reading newspapers, tracking social media discourse (I am on Twitter, Facebook and Linkedin – and I can tell you this is the most hated rally as far as Social Media mavens are concerned), watching business news or speaking to some of your “clued-on” friends.

So much so that the mutual fund industry that manages about 6 lac crs of assets as per my estimate has anywhere between 75,000 to 85,000 crs in cash, cash equivalents, short term debt or equity with corresponding short positions (hedged to neutralise long equity). Most of this money by construct is destined to get into equity at every fall in the market. Further, we are witnessing anywhere between Rs. 15,000 to Rs. 20,000 crs of net inflows into equity and balanced funds every month (Source: Association of Mutual Funds in India, monthly industry data publication). It is worth noting here that apart from equity mutual funds, we have private insurance companies, the LIC of India, alternative funds, domestic retail equity investors and multiple other investor categories but it is well known that currently only domestic funds are buying and others aren t firing as much. The current state of affairs is very elegantly explained as a liquidity driven rally but that to me is a first order lazy explanation because it s not like liquidity is at gun-point. Indians are known to have preferred fixed income investments, land, houses, gold, and similar other investment options. Further, a dramatic decline in interest rates and inflation elevates valuations naturally as discounting rates decline and from there on one must be attuned to living with higher index levels, higher valuations and correspondingly lower nominal returns.

Limited point, you don t get a correction only because everyone is wishing for it, waiting for it, asking for it, threatening for it or even praying for it! You don t even get a correction just because you see index at all-time highs or valuations above average.

I have no agenda in the for-correction or against-correction debate, as a house, we do not take cash calls in our equity portfolios, at all times we are committed to running a “best-ideas” portfolio where we think on a weighted average basis the earnings in the portfolio can double in every 3-4 years on a sustainable basis (high quality-high growth with longevity) and ensuring that relative to market our portfolios are at reasonable valuations. Yes, we do manage a Dynamic Equity Fund where we are committed to calibrating the equity exposure in response to market valuations as signified by our proprietary Motilal Oswal Value Index – and that fund currently has just about 40%-45% long equity exposure; in line with what I argued above. Rest assured, the asset allocation of this fund will be managed systematically and it won t be impacted by any opinions or arguments I am sharing here.

On the “for correction” side of the debate are number of arguments – one of the strong ones being possibility of some kind of global challenge emerging out of US (Fed actions) or China (increasing rumblings about glossing over very bad macros). This will always be a strong threat but any kind of international turmoil resulting in selling in our markets and hence a decline in our markets has in hindsight proved to be a strong buying opportunity. So, we all should be the happiest if we get the much-awaited correction in response to some international bad news. That would mean we get a much awaited entry point without any serious local economic concerns. There are domestic fears related to how GST impact will play out, how is the rural economy actually faring, NPAs in banks and troubled corporate sector, slowdown in IT, sluggish exports etc etc. Clearly the earnings growth and dispersion of earnings is skewed in favour of select sectors namely private sector banks, broader financial services like mortgage and consumer NBFCs, insurance, asset management, consumer discretionary like white goods, autos, building materials etc. There is also a rebound in select commodities and metals. There are some excellent new listings that have already happened and more likely around the corner which also presents us with growth oriented investment opportunities, absorbs supply and to that extent can contribute to evening out valuations.

It is worth noting that market has made new highs nearing around 8900-9200 multiple times in the last 3 years and each time the market has retraced in response to earnings disappointments emanating out of unknowns – RBIs asset quality review for banks and ensuing in NPA recognition, Chinese devaluation and commodity collapse, the Trump election and demonetisation and finally GST implementation. Each time the market was primed for an up move some such setback to earnings has spoilt the party. With this recent past experience, if we assume that each time the market goes up, earnings will continue to disappoint, we will eventually be proven wrong.

Corporate Profits as a proportion of GDP have touched an all time low of 2.9% as at end FY17 (Source: MOSL Research). Many indicators point to the beginning of a mean reversion on this front and eventually there will be a few quarters or a year or two years or significantly higher earnings growth in the near future and staying out of the market when other asset classes are returning poorly is a bad choice. It will be ideal to remain invested on existing holdings and add further investments by way of dynamic strategies, systematic transfers or staggered entry at regular intervals.

Happy Investing,

Yours Sincerely,
Aashish P Somaiyaa
Managing Director and CEO

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