Insights

“60 per cent of Sensex’ earnings are immune to most macro issues”

August 11, 2014 . Vidya Bala

With the run-up in valuations of a number of stocks, ‘quality of business’ rather than just ‘size of business’ will start mattering in stock choices, says Neelesh Surana, Head-Equities and Fund Manager at Mirae Asset Mutual.

In an interview with FundsIndia, Surana provides his views on the market and where opportunities may lie.

NS

 It appears that economic activity is picking up, despite higher interest rate regime and credit growth still lack lustre. Are we in for a regime of growth at high rates? What could be its implications?

 We (and the recent market movement based on it being a leading indicator) believe that India’s fundamentals will improve over the next two years.

However, economic reforms are critical both for the growth to improve, and also to bring down India’s cost of capital.

We believe that the recent increase in corporate confidence will help initiate revival in the capex cycle and the economic activity should pick from the second half.

Key reforms to help accelerate India’s GDP growth, and meet the tough target of deficit set by the government are  would be: (a) higher tax-to-GDP ratio, and GST implementation. (b) expenditure reforms, particularly reduction in fertilizer, food and fuel subsidies.

As regards interest rates, over time, interest rates should soften as structural issues related to deficit and supply side inflation are addressed. The government has started work to improve efficiency of food procurement and supply chain and invoked emergency powers to manage food prices. In our view, inflation is largely a supply-side issue that can be addressed through better economic policies.

 Do you believe the market is fairly valued now? Please substantiate. 

BSE Sensex is trading at 16.4x FY15, and 14.5x FY16 EPS. Markets are fairly priced, and returns will be in line with earning growth.

On a near term basis, therefore, markets are fairly priced. We now need reforms to help bridge the gap between valuations and the currently weak, but improving fundamentals of the economy.

We would like to highlight that about 60% of Sensex’ earnings is from overseas related businesses or regulated businesses which are relatively immune to many macro issues. The earnings are depressed for the remaining 40% bucket of non-exports / non-government / non-secular businesses, for which economic uplift is important.

Mirae Asset India Opportunities seeks to identify themes at their early stages. In the past year or so, could you share some themes that worked for you? 

Mirae Asset India Opportunities Fund has a balanced portfolio spread across sectors, and its alpha is broadly created across sectors through stock selection. On a sectoral basis, overweight position in pharma, auto ancillaries, and logistics have done well in the last few years.

What current themes or sectors are in focus in terms of their ability to deliver in future?

Among the conventional names we are positive on private sector financials, and pharma. The new themes which we are positive on are in areas like — internet; building products, manufacturing exports, and agriculture-related themes.

Are the mid-cap selections made in Mirae Asset India Opportunities picked using criteria different from what is used to filter stocks for Mirae Asset Emerging Bluechip?

The basic criteria of stock selection is same, i.e., participating in businesses which represent large size of opportunity, with good return on investment, run by efficient management and yet available at a reasonable price.

Between the two products, the allocation/weight differs as Mirae asset India Opportunities’ allocation to midcaps is about 30%, whereas the Emerging Blue Chip Fund is largely midcap-oriented.

Does the valuation or swift rally in mid-cap stocks bother you? 

Post the sharp rally in midcaps, we believe that risk-adjusted return profile is fairly balanced. Going forward, stock selection would be extremely important, rather than a generic view on midcap Vs large caps. The quality of business will determine returns rather than size of business. 

What would be your advice to investors looking to allocate between large and mid-cap funds?

The following points need to be considered to decide this:

–          Post the sharp rally in midcaps, we believe that risk-adjusted return profile is fairly balanced, and thus a diversified               opportunities fund appears a good bet at this stage.

–           From long-term allocation point of view, midcaps funds tend to give higher upside provided time frame is over 3 years.

–           The quality of business, will determine returns rather than size of business.

Considering these, it is advisable to have 30-40% in mid-caps funds, and remaining in diversified opportunities kind of fund.

Disclaimer:

The sector(s)/stock(s) mentioned here do not constitute any recommendation of the same and Mirae Asset may or may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. The portfolio of the schemes is subject to changes within the provisions of the Scheme Information document of the schemes. Please refer to the SID for investment pattern, strategy and risk factors.

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