Markets are attractive after recent correction, says Neelesh Surana

Trend of high allocation towards equities, which started five years ago, should continue going ahead, says Nilesh Surana
It has been a one-way street for the global equity markets. India, too, has seen across-the-board sell-off since the past few sessions. NEELESH SURANA, chief investment officer, Mirae Asset Investment Managers tells Puneet Wadhwa that the trend of high allocation towards equities, which started five years ago, should continue going ahead. Edited excerpts:

The market recovery on Friday after the Nifty hit lower circuit was quite sharp. What's your reading of the developments?

The markets are attractive post the recent correction triggered by coronavirus (Covid-19). The headline forward P/E multiple at 14.3x is below long term averages. Valuation-based on P/E multiple is further attractive if we consider that earnings are much lower than potential given corporate profitability is at already at multi-year low; and low interest rates. Also, the difference between bond yields and earnings yield is at its lowest level since the global financial crisis (GFC) in 2008.

Given the attractive valuations, we would recommend investors should capitalise on the same. However, discipline of asset allocation should be maintained given that coronavirus is an evolving situation and it’s difficult to quantify impact on earnings as of now. While a large part of risk is built-in current valuation, a timely resolution of crisis is important to prevent second order impact on demand and supply chain.

Has the sell-off shaken investors’ confidence in equities as an asset class?

The SIP flow which is relatively ‘non-discretionary’ continues to remain robust. Also, February inflow at Rs 10,700 crore is encouraging – and is the highest in 11 months, despite a sharp decline in the markets. While the pace of inflows could vary, the trend of high allocation towards equities, which started five years ago, should continue.

What’s your advice to the first time investors in the current market scenario?

Invest in a disciplined way in equities within the earmarked asset allocation, with long-term time frame. It’s important to remind that returns improve when we invest more in tough times at favourable valuations. SIPs are the most efficient way of capturing the volatility/downside.

How soon do you see economic indicators in India improving?

Economic activity should improve gradually driven by interest rate transmission, reforms and directed measure by the government to iron out sector specific challenges, etc. The Indian economy will likely see benefit from lower crude oil prices with lower current account deficit, lower inflation, lower fiscal deficit and gradual improvement in GDP growth. Interest rate reduction remains the most important lever supportive for market as fall in interest rates improves demand, improve profitability, and re-rate the price-to-earnings (P/E) multiple.

An important point is that markets generally are myopic nature wherein ‘price’ reacts disproportionately driven by short-term events (i.e. coronavirus), whereas the ‘value’ is driven by long-term assumptions which do not change significantly. Risks related to coronavirus is in a backdrop when earnings are already low compared to long-term average. The profit after tax / gross domestic product (PAT/ GDP) at 2.8 per cent is already at a 15-year low.

What has been your investment strategy amid the recent developments?

We continue to follow two pronged approach –a sort of barbell strategy with significant portion into high quality names which have now corrected, and at the same time participating in “deep in value” businesses.  Weightage in select public sector companies have been increased. Our cash levels are low. We do not see significant difference in valuation between the large-cap and the midcap segment and advise an allocation of about 70 per cent in large or multi-cap funds, and remaining in the midcap funds.

Any investment-worthy opportunities right now?

We are positive on banks, insurance, autos, healthcare, gas-utilities, building materials, etc. In addition, we have added few value public sector enterprises (PSEs), given that valuation disparity has widened considerably, with investors eschewing cyclicals while chasing certainty and growth.

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