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Axis Mutual Fund's equity schemes have underperformed in the last year, with value stocks the current flavour of the season.
Jinesh Gopani, Head of Equity at Axis Mutual Fund, shares his view on the performance of the funds. In an interview with Chirag Madia and Omkar Vasudev Bhat, he gives his take on the Indian equity markets and the sectors he is betting on. Here's the edited transcript of the interview.
The equity markets are volatile, and the past one-year returns have turned negative. Given the current global situation, like high inflation and geopolitical issues, what is the outlook for Indian markets?
Currently, India is doing relatively well in terms of market and currency performance compared to emerging market peers. Given the current situation in Europe, the US and COVID-led slowdown in China, India looks at a much stronger position than other countries.
The three key metrics which we keenly look at are oil, inflation and currency. In our analysis, if oil (price) remains at $100 per barrel, real gross domestic product (GDP) growth can be around 6.5 per cent, and inflation can be controlled. In fact, if oil remains at $100 per barrel, India will remain in a sweet spot. (But) if oil remains between $100-$130, there will be some pressure on India. It could also impact the GDP. (And) if oil remains above $130 for a prolonged period, there will be severe pressure on trade deficit and current account deficit.
In the last two years, foreign portfolio investors (FPIs) were underweight in India and moved to China due to valuation comfort. However, if oil remains under $100 per barrel and India can showcase a strong growth trajectory, then these FPI flows will surely return to India. In addition, if corporates can report average 15 per cent growth in topline and bottomline numbers and deliver 18 per cent return on equity (ROE), investors can expect 15-18 per cent returns going forward. Having said that, the returns can be front-ended or back-ended, and there can be some volatility due to the elevated valuations.
A few of Axis Mutual Fund's top equity funds have underperformed in the last year. What is the reason for their underperformance, and when do you see it recovering?
The real reason has been our style, as we are known to invest in quality and growth stocks. In the last two years, the value theme has worked, but with the Indian economy opening up after COVID shock and companies starting to deliver results, we have seen good returns in the last three months.
We saw this kind of underperformance in 2013 and 2016, too, when value was doing well, but in the subsequent years between 2017-2020, we bounced back and delivered good returns. Our style involves not buying anything and everything as we have a targeted approach towards quality and growth. (All said and done) we anticipate good times ahead.
You are known to be a growth investor and invest in fundamentally sound companies. In the last few years, we have seen the P/E of several stocks at elevated levels. What is your strategy with regard to high P/E stocks?
I think it has more to do with understanding the business model of a company and whether it has scalability, capable leadership and the ability to generate ROEs and cash for longer duration. Yes, in some cases, valuations are higher because markets give those companies risk premiums or scarcity premiums. This is because the profit pool of any sector is limited to only the top four or five companies.
Take financials, capital goods, or even real estate-profits pools of those companies are with the top companies of those sectors.
Normally, quality always comes at a price. So, good business coupled with scalability and strong corporate governance adds to the premiumisation of the stock. One should look at the company on the above parameters and not just try to look at only price to earnings (P/E) and try to deduce that it is a very expensive stock. Having said that, new-term valuations are obviously a concern because companies must deliver accordingly.
Has there been a shift from your high-quality and high-growth focus ideology to having a more balanced approach, by incorporating a few value-oriented stocks?
I think different people have different takes on investing. I don't believe we are in a camp where we need to bifurcate assets between value and growth or value and quality. At the end of the day, you want to buy companies that are here to stay for a long time and have the potential to deliver returns consistently. So, if we find any company available in any space that can offer high growth and ROE potential, we will look at them.
Many of the equity funds you manage have high cash levels in the last one year. Does that mean you are waiting to take advantage of market correction?
Frankly, a high cash level is not a specific strategy, and the idea is to ensure you're buying stock at the right price. So, just like you are concerned about our portfolio containing high P/E stocks, we are also worried that we should not buy any stock at any price. It is better to wait for opportunities during volatile times.
Interest rates have continued to inch up. How have you planned to structure the portfolio in a rising interest rate scenario?
The best way to play in a rising interest rate scenario is to look at private sector banks. This is because asset and liability mismatches are less. Also, their asset tenure is lower than the liability tenure, and assets reprice faster than liabilities repricing. So, it helps them cushion the margin impact. We believe private sector banks are in a better place.
Which sectors are you bullish and bearish about at this point in time?
If oil remains below $100, I think domestic-driven stories can report better numbers than export stories. If India is going to do well, then financials are clearly good to go because you're seeing credit groups coming back and people really consuming on the ground.
Even auto and auto ancillaries coming out of the chip shortage issues and higher oil prices will deliver consistent growth. One area we are avoiding at this juncture is the oil and gas sector, purely due to the inflationary pressure.
What are the risks to the Indian markets at this point?
From a domestic point of view, I think the only key risk is the high oil price, which might lead to inflationary pressure. This is the direct or indirect impact we can receive from the (current) global crisis.
Suggested read: Interview with Amit Tripathi of Nippon India Mutual Fund
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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