As the market rebound pushes valuations to historic levels, Mint speaks to Jinesh Gopani, head of equity at Axis Mutual Fund, on the outlook of equities, the effect of moratoriums of the banking sector and the company’s plans for international funds. Edited excerpts:
Market valuations have reached a 10-year high. Should investors lower their return expectations?
Valuations look at two aspects—price and earnings. While we all know the price, the reality is that the covid-19 situation has made short-term earnings estimates uncertain. The fall in output has made most traditional valuation models incompatible, and, hence, we have been advising investors to look at longer-term valuations rather than near-term earnings-based forecast models. In any case, long-term returns will depend on long-term earnings prospects and we do not believe there is any change in those assumptions despite the significant covid-19 shock. As the economy opens up and economic activity returns to normal, we believe that equities will continue to offer long-term opportunities.
The trend of a few large companies driving the market has continued over the past one-two years. In recent months one company’s weightage in Nifty and Sensex exceeded 10%. Will this trend continue?
The current market action is reflective of the economic environment with significant uncertainties. Broad-based economic growth allows for broad-based market participation. When things normalize, fresh market cycles will emerge and a new breed of emerging companies may challenge incumbents with innovative business practices.
We saw several companies emerge as credible business challengers after the global financial crisis of 2008. We continue to be growth-focused. The market will reward fast-growing companies with good multiples, not slow growth ones. Growth might be delayed due to the covid-19 crisis but it will come back.
Pharma and consumer goods companies recently fared better than traditional favourites such as banking. Will this sectoral rotation continue?
It is difficult to predict which sector will do well in the next phase of the economic cycle. Our strategy remains picking the leaders in individual sectors. A quick look at history shows that in markets, winners keep changing. As bottom-up investment managers, our view has always been stock-specific rather than sector-specific.
Does India need more stimulus for corporate earnings to revive? If yes, then how much stimulus is required?
The government, despite tight fiscal constraints, has provided significant stimulus through financial dispensations and credit guarantee schemes alleviating default risks to a large extent, thereby bringing back confidence in the economy and markets.
However, earnings will not recover in a hurry unless there is a significant change in the status quo i.e. opening of the economy. A long road to recovery looks more tenable right now and investors should be cognizant of the fact that health will take precedence over corporate profitability.
Around 30% of the loan books of large banks is under moratorium. Is another NPA (non-performing assets) crisis in the offing?
Quite the contrary, the moratorium was an essential step to keep the lights on for many businesses. Many of these businesses and individuals have started repaying loans as production lines roared back up in May and June. Management commentary from financial institutions indicates that utilization of moratorium fell significantly during the second phase. Many have delivered earnings surprises on the back of turn of events for them.
Actual NPA creation will only be clear over the next couple of quarters but we believe that the scale would be manageable. In the long run, such companies are likely to come out stronger from this experience and ultimately drive growth in the economy.
In 2018, you launched Axis Growth Opportunities Fund, which can invest up to 35% in global markets. What has been your experience? Do you plan to bring this kind of a structure in more schemes?
The fund was launched as a large-and-mid-cap scheme, offering investors a meaningful allocation into global stocks. Along with our partner, Schroders Plc, we have been able to build a portfolio aimed at offering the best of both worlds—eclectic domestic growth and exposure to global titans of innovation and industry. The fund invests up to 30% of its assets internationally where we directly invest in overseas markets.
The capability allows us to offer global solutions in a tax-efficient setting. We have received positive feedback from investors and partners, and despite being less than two years old, we are seeing a lot of interest.
In January, we launched our second fund, focusing on environmental, social, and governance (ESG), which invests a part of the portfolio into global equities. We believe that global allocation is essential, as it allows for capturing opportunities that are not available here.
The added diversification to less correlated markets makes these offerings a must-have from an asset allocation standpoint. The next step is to launch dedicated global products and we have a number of them lined up.