'Besides banking, we have a positive outlook on pharma and healthcare'

With over a decade of experience under his belt, Ankit Jain is a skilled hand at investment analysis and fund management. Though he started off his career in tech, Jain switched to the financial services sector shortly thereafter. After a brief stint at Equirus Securities as a research analyst, Jain has been associated with Mirae Asset Investment Managers since 2015.

Presently, Jain oversees four schemes at the fund house - Mirae Asset Great Consumer, Mirae Asset Large & Midcap, Mirae Asset Midcap and Mirae Asset Multicap - which have a collective AUM (assets under management) of Rs 64,500 crore.

In this exclusive conversation, Jain delves into the factors affecting the mid-cap fund's returns and the steps he's taking to improve its performance, the sectors that could outperform the broader markets in the long run and his views on new-age companies.

Below is an edited transcript of the interview.

What's driving the current market rally? Is it more about investor sentiment, or are we seeing strong fundamentals at play?

Earnings growth has panned out really well, not only in the last one year but over the last four to five-year period. There's a stark change in the earnings growth trajectory. To give some data points, if we look before the Covid-19 period of around 10 years (2009-2019), the earnings growth in the large-cap segment of the markets was around 6 per cent CAGR (compound annual growth rate), while for the mid-cap segment, it was approximately 8-9 per cent CAGR. However, in the last five years, the trajectory has improved to approximately 20 per cent CAGR across both buckets, largely due to the robust performance of the economy. There has been significant improvement in fundamentals across different sectors, led by government policy changes, regulations, tighter compliance, and more digitalisation.

That said, the large-cap segment might have performed in line with the earnings growth, so to that extent, valuation rerating has not been that sharp compared to the mid and the small caps. The mid and large caps have generated a significant portion of their returns by rerating their valuations. Given the current state of the economy, several investors believe that high earnings growth could persist over the medium term (next three to five years), and they are willing to pay the premium. So, to that extent, I think mid- and small-cap valuations have rerated significantly in this process. However, I will say that strong market returns are not only driven by investor sentiments but are backed by pretty good fundamentals and good earnings growth, and that is likely to continue going forward.

We've recently seen sharp declines in markets like Japan and the US. Could these be early signs of a potential bear market ahead?

It's very difficult to say what will happen globally. But one thing is sure: things are slowing down. If we look at some of the data points from the US, unemployment has risen slightly. The inflation rate is decreasing, and there are discussions about the need for interest rate cuts to boost demand or, potentially, lower the unemployment rate. Regarding Japan's carry trade and market corrections thereafter, I think it's very difficult to predict. However, given the current state of affairs, it is evident that global growth needs to decelerate compared to the previous five to seven years. If you try to exclude the Covid-19 period (2020-2021), we have seen a very high interest rate globally, which needs to be corrected.

The Mirae Asset Midcap Fund had a bit of a tough time, underperforming its peers in 2023 and into 2024. What do you think has been the reason, and how do you plan to get things back on track?

We have just completed five years of the fund, and the returns since inception are quite good and satisfactory.

That said, markets have rewarded many stocks disproportionately in the segments such as infrastructure, utilities, and capital goods that were under-indexed. The underweight stance on these names was in the context of the last decade; financials, in many cases, did not fit our investment criteria, and in that context, we find them expensive. But clearly, we were proven wrong right away because they had seen a strong buildup in the order book, and there were positive surprises even in the margins, which led to earnings upgrades and significant reratings in some of those names. So, the underweight stance in a few names has clearly impacted the performance over a one-and-a-half or two-year period.

Moreover, our overweight position in chemicals and consumer discretionary has resulted in earnings downgrades in some of these sectors, leading to underperformance in the sector as a whole. But now there are clear signs of mean reversion; we have seen demand picking up and inflation collapsing, which will help the consumer discretionary sector. At the same time, positive surprises in the industrial and infrastructure sectors are going away.

Should investors expect any tactical shifts in the portfolio?

You attempt to find a middle ground, as the narrative in certain segments is particularly compelling. So there are two ways to deal with such a situation: if you have missed investing in those stocks, try to benchmark (buying the same allocation as the benchmark), or maybe increase the exposure in some of those segments. The second way is to try not to do anything forcefully, invest where you find the valuation attractive, and keep the position intact. The broader construct of the portfolio is still pretty much in sync with where we see a disproportionate risk reward with a reasonable margin of safety over the medium term.

Mirae funds have shown a strong conviction in the banking sector, even though it has weighed on performance over the past 18 months. In light of this, how do you reassure your investors?

This sector has significantly improved its fundamentals compared to five to seven years ago. If you take a quick look at the sector, it boasts the highest returns on assets (ROA) at 14 per cent, and its balance sheet has also significantly improved. The underlying credit growth is in double digits, and the fundamentals are very solid.

Despite all the positives, the sector has not seen a rating. Some stocks may be trading at a premium to their historical average, but overall, the sector has not seen a rerating. In the future, there may be a slight decline in the net interest margin (NIM), but overall, there is no significant buildup of stress that could potentially disrupt the return ratio.

There are certain challenges concerning deposit mobilisation, and to that extent, credit growth in the next two quarters may be relatively slow. However, if the country and economy are to thrive, this sector must also perform well, and the current valuations are reasonable.

Looking at the current market, is there a sector you believe could outpace the broader market? What's driving your optimism?

Besides banking and financials, we have a positive outlook for the pharmaceutical and healthcare sectors. Clearly, the fundamentals for the healthcare sector have improved significantly, with relatively better pricing in the US generic market. On top of that, companies have invested significantly in R&D to build a pipeline for complex generic products. Moreover, besides the US, many emerging markets are now becoming pretty good opportunities for many of these companies. Indeed, some of these emerging markets hold significant potential, particularly the consumer discretionary category, which continues to be a consistent theme in the Indian market.

The Mirae Asset Large & Midcap Fund and the Mirae Asset Midcap Fund both hold Nykaa and Delhivery, which haven't performed well against the mid-cap index. What's your take on the e-commerce space, especially given the recent underperformance?

I don't want to go into the specific names of the companies that we hold. But as said earlier, we have been positive about some new businesses. While some names have done well for us, others may not have for various reasons. Many new-age companies share the common thread that they are market leaders in their respective sub-segments, which is a very strong entry barrier in the fragmented market. In certain instances, these companies dominate their respective markets. Therefore, their business moat is relatively high, as they are market leaders and enjoy significant competitive advantages. Given the growth in India, one should not worry too much about the growth prospects of such companies. To that extent, it fits perfectly in our investment framework for the business selection. Once again, these businesses receive support from strong and passionate promoters or entrepreneurs and a robust board.

However, the tricky part lies in the valuations, a crucial component of our investment framework. Even when we examine the earnings of these businesses, we consistently observe improvements, except for one name that may have underperformed due to near-term challenges. There are always challenges in business, and the focus should not be on the next one to two quarters, but rather on the business moat over the long-term horizon. The near-term earnings outlook is experiencing a significant boost in the current market. However, I believe that these near-term earnings could face challenges or not be as strong due to various factors. Regarding our investment philosophy, we remain fairly comfortable with many of the newer businesses despite many of them doing well in the past.

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