Follow asset allocation framework, stay invested

Veteran fund manager Tridib Pathak, senior director at IDFC Mutual Fund, says irrespective of market conditions, retail investors must have faith in the long term growth prospects of India and its capital markets. In an exclusive interview with FE’s Saikat Neogi, he underlines that investors should not try to time markets and invest depending upon one’s risk appetite and goals. Excerpts:

Given that there is large-scale redemption from mutual funds, what should retail investors do?

Irrespective of market conditions, we always advise retail investors to have faith in the long-term growth prospects of India and its capital markets. Secondly, investors should not try to time markets, as no one can. Thirdly, one should be invested for the long term in equities, at least three years. One must follow an asset allocation framework, so that one invests depending upon one’s risk appetite and goals. One can also avoid market timing by periodically re-balancing asset allocation according to one’s framework.

How do you think emerging markets like India will perform in the long-term?

India’s relative position as an investment destination has improved a lot over the past two years and it has emerged as one of the few countries with continued high growth and with comparatively better financial health. Led by favourable demographics, rising personal income levels, low indebtedness and domestic centricity, India’s high growth is secular. All of this, is in the context of a developed world, which is struggling to grow and is facing structural, and not cyclical, issues. So, the long-term case for Indian equity markets is quite positive.

What is the outlook for equities in the short-term?

In the short to medium term, we think that there are four factors which determine equity markets outlook – valuation, sentiment, liquidity and earnings. Valuation-wise, we are trading at fair levels. In the short run, we feel there is not much scope for any upside in valuations which are already at about 17 times one-year forward earnings. Sentiment and liquidity depend on how the global macro-risks shape up and how that affects risk appetite. On a medium-term basis, both sentiment and liquidity should be favourable for India. In the short- to medium term, earnings growth and earnings upgrades are very crucial. While we do not think that there will be any significant earnings upgrades in the short term, we think continued strong economic growth and a resultant upgrade in corporate earnings forecast over the year will be the key drivers for Indian markets from here on. On a domestic economic growth basis, we are fine. The actual delivery of growth will be the key and inflows will continue to be diverted towards fundamentally sound companies, which have been able to keep the faith of investors with sustained operational performance. As a result, we will see increasing divergence in performance among sectors and among companies within a sector.

What are the international factors which could damage investor confidence in India?

The biggest risk to investor confidence and thus Indian equity markets, is the global macroeconomic conditions. The developed world is facing real structural problems. Sovereign debt levels, total debt levels and fiscal deficits of the developed world are reaching unsustainable levels. Most developed countries are having total debt more than triple the size of their GDP and their fiscal deficits are rising fast. This situation has developed over years of low savings and dependence on cheap debt. Further, the developed world has attempted rampant stimulus over the last two years while trying to revive economic growth. But it is increasingly appearing that their economic growth is becoming dependent on continuation of the economic stimulus. But this will lead to further worsening of fiscal deficits and debt levels. Thus, we have seen widespread fears of a sovereign default, Greece being a case in point, and also of a banking crisis. These fears have ebbed recently. However, what is becoming clear is that the developed world faces prospects of slower growth for a prolonged period of time. Most of Europe has adopted austerity measures to rein in fiscal deficit; but this may lead to slower economic growth.

Which are the sectors that will stand to gain from the slowdown in Europe?

In our portfolios, we run a theme ‘Beneficiaries of Global slowdown’ in which we invest in companies/sectors which may benefit from a slowdown in global growth. There two kinds of such companies/sectors — ones who may benefit from lower input costs due to lower commodity prices like autos, consumer goods, oil marketing companies and secondly, ones who may benefit from increased outsourcing as the developed world searches to cut costs like pharma outsourcing and IT services.

Source: http://www.indianexpress.com/news/follow-asset-allocation-framework-stay-invested/663299/0