Attractive opportunities in large, mid-caps: Neelesh Surana

Investment should largely be skewed more towards blue chips, though mid-caps too offer them, says the Chief Investment Officer at Mirae Asset Global Investments (India)

November 12, 2019 10:14 pm | Updated 11:06 pm IST

Neelesh Surana. File

Neelesh Surana. File

Markets are likely to remain volatile but there will be a gradual recovery over the next few quarters, says Neelesh Surana , Chief Investment Officer, Mirae Asset Global Investments (India). Excerpts:

Equity market is witnessing a lot of volatility. What is your near term outlook for stocks?

Global growth indicators are mixed with some stabilisation in PMI breadth. An important aspect is that all large central banks are now expanding their balance sheets. Current global environment has twin positives for India — low commodity prices particularly oil, and benign interest rates. India’s growth has slowed over the past year and markets have witnessed volatility on account of same. While it’s difficult to time the reversal in the market, we believe that it could be a gradual recovery over the next few quarters driven by four factors namely favourable base across many businesses, directed measure by the government for sector-specific challenges, likelihood of decent rural demand with reasonable monsoons, and most importantly full impact of low interest rates. Interest rate reduction is the most important lever supportive for market as lower interest rate improves demand, improves profitability, and re-rates the P/E multiple. We expect interest rates to remain benign owing to negative output gap and benign inflation.

As per AMFI data, fresh flows in equity schemes have been largely subdued in the last few months. How do you see such fresh flows in the coming months? Given the volatility do you think retail investors should relook at their existing SIPs or wait before starting new ones?

SIP inflows have increased significantly from about ₹3,600 crore every month to more than ₹8,100 crore per month, an increase of 120% in brief span of three years. An important aspect of SIP flow is these are sticky and long-term. If we look at the trend, the reversal in domestic flow started in FY15 – over the last five years, domestic MF has witnessed inflows in excess of ₹3,20,000 crore. We believe that the current levels of SIP inflows should continue. The long term potential for SIP bucket to increase materially is there as investor experience of return expectation (say double digit) is met.

Retail investors often look at mid-caps and small-caps for investment opportunities. Do you think this is a good time to look at that universe?

We have always believed that investment should be in ratio, say 70:30 skewed more towards large caps/blue chips. There are multiple reasons for high core allocation to large caps — (a) large caps are not mature given India is growing economy (b) many large companies have better operating matrix (c) they provide safer risk-adjusted returns with low drawdown. Midcaps do offer interesting and deep in value opportunities, which investors should take advantage of. However, this should be not at the expense of large cap. An important aspect in current market is the polarisation in valuation, across market capitalisation. We are witnessing significant divergence in valuation between ‘richly valued quality business with predictable earnings’ versus ‘deep in value businesses where the earnings visibility is patchy’. We believe current polarisation in markets offers attractive opportunities across both large and mid-caps.

Debt has seen a lot of turbulence in the recent past due to defaults and downgrades. Would you recommend investors to stay away from debt and allocate more towards equity?

Equity is long-term asset class and cannot be compared with debt which has more linear returns. Within debt, the recommendation would vary depending on risk profile of investors. For conservative investors, we would rather recommend accrual products. However, for sophisticated investors, credit return fund at this point is also recommended given the opportunity to take advantage of high credit spread.

Domestic institutional investors have been a big support in the current calendar year when FPIs have been mostly net sellers. Do you think the trend will continue?

From near term viewpoint, given stabilisation of global factors and low yields globally and risk-on, we can see inflows in emerging markets including India. FIIs recorded net inflows in both equities and debt market at $1.8 billion and $564 million, respectively in October. In the current calendar year, FIIs have invested over $10 billion, which is sharp reversal to selling of $4.5 billion in CY18. From long-term trend viewpoint, domestic investors have exhibited high maturity by committing investment for long term through the SIP route. Mutual fund inflows have been strong over last five years, and are likely to continue as return expectations are met. As a result, DII ownership of Indian equities has increased from 10.5% in March 2014 to 13.3% in September 2019, while FII ownership has inched down from 21.8% to 21.3% in the same period.

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