Just a quick word on the way market seems to have changed direction or gears in the last two days. But at the same time, I would say this appears to be one of the most awaited corrections. For weeks now, we were talking to strategists such as yours and everybody was saying that market may have run up quite a bit. Some pullback will only make it healthier. Do you agree with this hypothesis looking at the structure of the market or would you be a little on the cautious side even after the cut we have seen in last two days?
I think corrections are always healthy. This gives the opportunity to some of the investors also to rethink and revisit the hypothesis and maybe time to reinvest. But yes, I think given the way the valuations have run up, especially in the small-cap sector, I think that we needed some correction. Because I think when we look at it from the longer-term perspective, of course, the valuations are expensive for large cap, midcap. But trajectory for small-cap was significantly higher which is where we need a breather and maybe the correction is a good point for people to revisit. How are you looking at the quality of earnings, the narrative of some of the management commentary coming in after the numbers or even concalls, looking at GST collection data? If I take a two to three year kind of a perspective, what would your hypothesis be?
Yes, I think first on the earning itself the report, the quality of the earnings till date, whatever is reported when we look at this earning profile, obviously the top line is slightly weaker.Some amount of weakness on the top line could also be on account of commodity softening. But when we look at the underlying operating profit metrics, companies have benefited from lower commodity prices.
And that is where you have seen double-digit kind of a growth as far as earnings is concerned in the quarter in many of the companies.
And maybe that is where the sectors like capital goods, auto, and in some cases the refining companies have also done very well.
Now, coming to your point on the longer-term perspective, how should we think about valuations and how should we think about it? So see, from global perspective, India is still a place where the earning growths are expected to be reasonably, if not very high, at least we can simply say that mid-teen to high-teen kind of a performance on the earning which is also reflected on the consensus, should be more or less achievable taking away some percentage here and there.
If that be the outcome for India, I think we are one place where we will see a lot of inflows also coming in, which will keep the markets on a healthier side. And that is where we should expect that the momentum in the market from a longer-term perspective should continue.
We are looking at cash levels at several mutual funds or industry in general has been slightly edging higher. What in your mind would be the average cash levels across mutual funds, AMCs or even at yours? And how is the inflow? I understand that you are also in the middle of launching another Balanced Advantage. So are investors piling in? Is there a structural flow of funds from domestic investors?
Actually the monthly SIP run rate is as healthy as what we generally see. And maybe it is hard for me to comment on the industry side. At UTI, we do not take a lot of cash calls. But certainly for meeting our redemption or maybe some sort of opportunistic way, we will probably look at keeping some level of cash.
But maybe you are right in assessing that on the mutual fund side, we would have seen some amount of higher cash levels compared to what we have seen which is also natural because as you get inflows but you do not find material high investment opportunities, maybe some of them would be kept asides so that is a natural process in which we will be managing the cash flows.
So yes, that is how I will put it. Because there is this valuation which has run up and which is where some amount of adjustment, as far as your holdings are concerned, will be done.
Talk to us also about your Balanced Advantage NFO, which you are planning to launch?
Yes, so I think a pertinent question which every time I meet investors or distributors or even an anchor like you, who would have experienced that there is this constant question in mind of investors that what do we do because markets have hit all-time high?
And there is a natural question that what do we do with the money now? Should we be investing or should we be redeeming? But typically what we have seen through one of the investors’ study, which has been done by Morningstar which suggest that because investors keep intervening in the market in ups and downs, they mistime the market which is where they incur potential losses.
Now for investors to avoid such potential losses, it is better to actually go, come and get invested in the scheme like the Balanced Advantage Fund, which is basically timing the market based on valuation rather than taking a call on what is the level of the market.
So even in UTI Balanced Advantage Fund, we will be basically increasing or decreasing allocation to net equity based on the valuations which will be guided to us by our model.
And that is our approach and it is a product for an investor who is looking for potentially a reasonable return but at the same time is afraid of these high volatility which are there in the underlying market. So yes that is where this product is suitable for the investors.
But still, a quick word on the market if we analyse it. Which areas of the market are you witnessing maximum risk reward opportunities where earnings are reasonable and valuation are reasonable and which are the ones where you see sparks of froth developing?
Yes, certainly when we look at the composition of market, it is pertinent to talk about the big two part of the market which is probably your IT and banking as a space.
So when you look at the IT which is today in mix of news, news flows which is probably not as good news flow as far as sector is concerned.
This is area where probably the news flows can continue to remain negative but we need to understand that the order book or the order inflow for these companies continue to remain healthy. And the valuations which have also significantly corrected in last one-one and a half year.
So maybe that area where the news flow is going to remain negative but valuations have corrected and it is a healthy cash flow generating space as well.
So maybe IT services as a space selectively can remain positive from our perspective.
Banking as a space continues to remain healthy profitability. Balance sheet of the banks is significantly healthy compared to what it was in past. So I think that space also remains in the positive bucket as far as we are concerned so especially on the private sector bank.
Where we have seen a good amount of order inflow, momentum, healthy profitability is again auto and capital goods.
They also remain in a positive bucket. Now areas which I think where investors need to urge caution is probably, yes I said capital goods is reporting healthy profitability.
But this element of froth is certainly building in some of the again small cap plus some of the capital goods name so which is where investors need to be significantly urging caution that just reporting some orders may not necessarily result in future profitability so there are pockets in small cap where the froth is building in which is where investors need to revisit the history of these same companies and just make a sensible decision as to what should be the valuation which investors should actually be paying for these companies.
But if you were to revisit so revisit sectors probably where we would look to remain underweight other than these frothy areas of some pockets of small cap.
So that is certainly one area where we are under underweight or maybe will look to remain underweight. Again selectively maybe some stocks in power utility may look good but again this area it is basically a slow growth and it will need a huge capex that is one area where we will again be remaining underweight as far as sector is concerned.
And one area which from our perspective will be probably also look to remain overweight or positive is select pharma companies which is where we have seen on the US generic side that pressure has come off.
