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Markets have moved out of the panic phase: Ajay Tyagi of UTI MF

Ajay Tyagi, executive vice president and fund manager (equity) at UTI AMC
As markets recover gradually from their March 2020 lows, AJAY TYAGI, executive vice president and fund manager (equity) at UTI AMC says there are many mid-and small-cap stocks that are available at reasonable valuations now. The financial sector, he tells Swati Verma, may go through a volatile phase in the short term, but its ability to create value in the long-term is fully intact. Edited excerpts:

Is the worst over for the markets or can they retest their March 2020 low?

The sudden fall that we saw in the Indian markets in March was a panic and a knee jerk reaction to the unprecedented move to the lockdown of the economy. A doomsday scenario was being built in at that time, which led to such a significant correction. One needs to keep in mind that no matter how severe the economic downturn, the intrinsic value of most businesses is not as deeply impacted as the stock price correction during the early phases of such downturns. While nothing can be said with certitude about the direction, but it does appear that markets have moved out of the panic phase. That said, they may continue to remain volatile and keep reacting to the incoming data in the short-term.

The policymakers have announced a slew of measures to revive the economy that's been punctured by the Covid-19 pandemic. Do you expect more such measures in the months ahead?

It does appear that there is room for some more monetary and fiscal expansion. But the Reserve Bank of India (RBI) and the Government may want to keep some powder dry for the time being and watch the situation as it unfolds before they fire the last few bullets very thoughtfully.

Your view on mid and small-cap indices.

If one were to take a close look, it is evident that despite the overall correction in the mid-and-small caps over the last couple of years, many stocks from this segment have done very well and have in fact outperformed the market significantly. Rather than predicting the recovery, we would continue evaluating business models and wherever we see a sustainable and scalable business model that will generate cash flows and create economic value, we would go ahead and build exposure in our portfolio.  The good news is that are many mid-and small-cap stocks that fit the above the requirement and are available at reasonable valuations now.

What has been your investment strategy during the recent market turmoil? Overweight and underweight sectors?

We tend to evaluate businesses over a three – five-year time frame rather than the next few quarters and this leads to a fairly stable strategy for us with low to negligible sector rotation. We follow a bottom-up strategy rather than taking any top-down views and this keeps the portfolio turnover ratio low. We have been consistently negative on sectors like metals, oil & gas, real estate, infrastructure, aviation, and have been positive on private sector banks, consumer goods, pharma & healthcare, and IT services. This hasn’t changed one bit during the Covid-19 crisis.

Equity, SIP flows continued to decline in May given the market volatility. This shows investors' nervousness. How do you see this? What has been the trend in your fund house?

The behaviour of retail investors has been more rational than what I would have expected. While SIP flows may have come off slightly, but the industry continues to witness net positive flows on the equities side despite such widespread panic. There is certainly much more stability in the markets now compared to March and April, which makes me feel that investor anxiety would remain under check and the net flows will continue to remain positive and at some stage, SIP flows would also start to move up. At UTI, the trends have been similar to the industry-wide trend.

Your view on the financial sector, especially, in the wake of the moratorium announced on loans? Even the IT sector could see an impact if H1B visa curbs.

The financial sector may go through a volatile phase in the short term, but its ability to create value in the long-term is fully intact. While challenges exist in the near-term related to the moratorium, asset quality, growth, etc. but for well-managed banks and NBFCs, the longer-term structural theme remains resilient. India continues to have a low household debt-to-GDP ratio and the runway for growth over the next decade is firmly in place. Of course one needs to be cautious about the underwriting standards of the financial institution that one is evaluating and its past track record. Being the least favoured sector today, the valuations for this sector are already reflecting the above concerns and hence are very attractive for those who are looking at the big picture.

While we are positive on the IT and pharma sectors, but not because they are defensive and provide downside protection in the current environment. In fact, we have been positive on many businesses from these sectors for a long time on account of the profitable and sustainable growth opportunities that they offer. With more and more businesses reimagining their digital footprint and pushing for an online strategy, IT services businesses should witness strong growth in the medium-term.

What are your revised estimates for corporate earnings growth in FY21?

As of now, the situation is so fluid that any attempt towards forecasting earnings growth for FY21 is just a theoretical exercise and we clearly don’t want to reference ourselves to an abstract number. However, directionally we feel that earnings revival would be the fastest in consumer staples, consumer durables, pharmaceuticals, and IT services.


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