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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Investors should expect subdued benchmark returns this year

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Mr. Gautam Sinha Roy

Fund Manager, MF

Markets are at an all-time high. What is driving this rally?

The market rally can be ascribed to high inflows coming into markets and chasing asset prices up. This is happening as inflation/ risk-free rates have come down thus resetting return expectations down across the risk curve. In other words, PE multiples of all securities have gone up.  Both domestic and foreign inflows are driving this liquidity surge.

 I cannot see anything that could derail domestic inflows for now.

Equity has a low allocation of ~4% in Indian households’ financials savings. At the margin, this is improving. There are many factors, which are contributing to domestic inflows into equities. First, inflation has come down and so has repo rates. This has reduced the returns of bank saving products, making them less attractive. Another factor is lacklustre performance of physical assets, like gold and real estate. People are now moving to equity to get better returns to achieve their financial goals.

Then there are the foreign inflows. India will continue to attract foreign inflows.  The country’s GDP growth is one of the highest in the world, making it an attractive investment destination for foreign institutional investors.

What is your outlook on the markets?

Currently, Nifty trailing PE is high at 22.5x. Clearly, there is scope for a correction in this, especially in the absence of earnings growth. We have been lived with no earnings growth for the past three years.

However, we believe the worst of earnings growth cycle is behind us. We expect earnings growth to pick up and turn around in beaten down sectors, like commodity and metal. Commodity prices have, in fact, started to recover. In addition, we believe PSU banks will contain their NPAs from deteriorating further. All these are cyclical factors which should lead to a recovery in earnings.

But the sustainable earnings growth will happen only when we have widespread recovery in demand across sectors. This, we are yet to see happening. The government push for affordable housing and prospects of good monsoon will drive demand growth in the economy going forward.

Keeping all these factors in mind, investors should expect subdued returns from the benchmark in FY 2017-18.

What could spoil this party?  What risks does the market have currently?

We are structurally in a lower inflation-and-moderate growth environment. We do not foresee drying up of inflows to equity market, as the causes remain in place, i.e., poor performance of physical asset prices and low interest rates.

On the other hand, it is difficult to predict foreign inflows, but then inflows from this channel are not now smaller as compared to domestic inflows.

Continued disappointment in earnings growth is the key medium term risk to the market.

How have you changed your tactics in light of the sharp run-up?

There is no change in the way we are managing our portfolio. We continue to follow a focussed strategy. Diversified portfolios aim to mitigate risk by increasing the number of stocks. Studies have shown, though, incremental risk reduction is immaterial beyond 20-22 stocks.

Hence, there is no point in holding too many stocks if the purpose is risk reduction. In addition, an investor should know that every fund manager has a bandwidth. It is difficult to track too many stocks.

We continue to remain invested in stocks with high structural growth potential. We believe that while current multiples are expensive, they get somewhat compensated by the high growth in earnings.

Which sectors do you think will play out well in the next three to five years?

With the government’s push for affordable housing, we continue to bet on the housing finance sector. We are bullish on NBFCs and banks that are in the business of housing and personal loans. In the medium term, the growth will come from this sector. We are also confident on prospects of the insurance sector, which is underpenetrated and will benefit from shift from physical to financial savings (much of insurance sold in India is a hybrid protection and savings product).

Other sectors we are bullish on are aviation, two-wheelers and pharmaceuticals, but in select pockets only, i.e., only two-three companies in each sector are worth investing in.

How can buy right-sit tight be termed as active fund management if the philosophy is to hold the stock long term?

Active fund management is not about frequent churning or Activity. Active management is to manage equity assets by selecting a few stocks from a broad index, with the ultimate objective of outperforming the index consistently. The stock might be changed only when their prospects of delivering superior returns disappears.

Our job is to predict stock return potential over a long-term period based on fundamental analysis. We have to select pockets of winners from the entire economy.

Basic fund management strategies are more or less similar across fund houses. How difficult is it to stand out from the crowd, especially when it comes to fund management?

We have a very well defined and documented investment philosophy, which helped us differentiate ourselves in a crowded market place.

We believe in the buy right-and-sit tight approach, i.e., to invest with great conviction and stay the course as long as the stock offers enough returns to be made for investors.

I believe there is space for all sorts of players – right from day traders to real long-term investors – in the equity markets. The choice is for the participant to make.

Which category of equity funds would you recommend investors to invest in at this juncture?

Given the high valuations prevailing in the market, investors should go for dynamic asset allocation fund category, where fund managers can rebalance the portfolio based on prevailing market conditions and prospective returns.

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