Domestic equity market benchmark indices are ending the calendar year 2021, down 8% from their all-time highs. While Dalal Street has seen a double-digit correction recently, the benchmark Nifty 50 is trading at close to 21x Fwd. PE, which is still expensive said Amit Premchandani, Senior Vice President & Fund Manager – Equity, UTI Mutual Fund in an interview with Kshitij Bhargava of Financial Express Online. He further shares his outlook for 2022 and suggested what investors should do after the recent correction to make the most of their investments in the new year.
2021 is ending with markets nearly 8% down from all-time highs. What message should investors take from this heading in 2022?
Valuation of the broader markets are atthe upper end of long term ranges. Nifty 50, post the recent correction, is trading at close to 21x Fwd. PE, which is still expensive, on the positive side, earnings growth has revived and is expected to be 30%+ in FY22. A small correction in the markets post the sharp rally over last 18 months is part and parcel of the cycle.
What sectors are you bullish on from a medium-term perspective?
In an era where BNPL players are getting a valuation on P/GMV or P/Sales, India, with bank credit to GDP at less than 60% and retail credit to GDP at ~20%, is a highly underpenetrated market. On top of that, the need to offer digital services to the millennials as well as the comfort of brick and mortar branches to traditional customers provides unique advantages to the large private banks, who have demonstrated agility in moving on both tracks. Capital levels of private banks are at all-time high levels, providing enough firepower to grow. Therefore, lending growth will most likely revive as the nominal GDP starts growing. Also, some bankshave been aggressive in making provisions for past or future losses and have retail funding avenues. Banks arealso the likely beneficiary of a cyclical uptick in the domestic economy post-second wave; while asset quality outcomes in both waves have been milder than feared for most private banks. All the above factors make it one of the sectors with the most favourable risk-reward.
One of the prominent discretionary consumption segments is auto where per capita penetration levels have been flat for many years with PV volumes hardly showing any growth even on a decadal basis. We are cognizant of the EV risk in the sector and have positioned sized accordingly. Across PV/2W/tractors segments, companies are operating with strong cash flow profiles and decent return ratios. Volume growth is a factor which is missing and we think that would revive after 3 bad years.
The pandemic has exhibited resilience and reliability of India as a partner; IT and pharma are 2 key sectors as far as exports are concerned. Expenditure on IT as a percentage of overall revenue is increasing across the globe. We had moved to marginal OW in IT in the early stage of the pandemic, however, we have booked profits as current high demand growth is being extrapolated for eternity. IT services primarily cater to developed markets, which on average grow nominally at ~5-7%; the growth of 10-15% that is priced in valuation for IT sector is slightly discomforting, hence we pared our exposure. After a dream run in early part of last decade, pharma exports were impactedby the sharp erosion in generic prices and quality-related issues in some of the plants. However, pricing damage on generics is largely done while unlike IT, domestic pharma is a big market that provides stable growth. Therefore, this sector had taken the largest overweight position over last 2 years. We have further added a domestic pharma name which is pure play with high concentration of chronic and close to zero exposure to exports.
Do you think investors should rebalance their portfolio for 2022? What will be your suggestion to build a portfolio to combat market volatility?
Market is expensive as far as trailing valuations are concerned at close to 25-26x PE, while if we look at forward earning, it is trading at close to 21x PE, which is a premium to long term averages. Even on price to book value metrics, both NIFTY as well as Midcap indices are trading at multiple which are above +1 standard deviation to long term averages. Hence valuation suggests thatinvestors should be cautious in putting in fresh money in the market.
Investors should focus on asset allocation; allocation to equity should be realigned to reflect individual risk appetite. Investors should avoid timing the market and focus on giving time in the markets for their investments to bear results. Large part of the equity allocation should be into diversified funds in various market cap categories. Sector fund allocations should be limited as it involves carrying asymmetric risks.
What have been the major contributors for UTI Value Opportunities fund performance throughout the year?
On a 1-year basis, the key positive contributors have been our overweight exposure in select banks, superior stock selection in the IT sector and underweight exposure in the oil and gas space. Whilenegative attribution has been driven by our overweight exposure in the automobile space.