Earnings recovery would be important for the markets going ahead<
02-Mar-17   14:47 Hrs IST

Mr. Pradeep Gokhale
In an interview with Anjali Raulgaonkar from Capital Market Publishers, Pradeep Gokhale Senior Fund Manager, Tata Mutual Fund, said, We believe in the next two years three themes are likely to play out: Higher capex by Governments and public sector companies – We are playing this through cement, select industrials and construction companies and select Public sector companies.


  1. What will the key driving factors for markets going ahead? How are your funds positioned in the current market conditions?

The markets have risen strongly in the first two months of CY17 on the back of resumption of flows to emerging markets and better than expected corporate results, for most companies. Looking forward, I think implementation of GST would be a big structural positive. Also, economic growth is expected to improve, as the effect of demonetisation wears off. However, post the recent rally, markets are fairly valued. Thus, earnings recovery would be important for the markets going ahead. In our funds, we are focussing on stocks with decent earnings growth prospects and reasonable valuations.

2. How will you rate Union Budget 2017-18?

The key feature of the Budget is focus on stability and continuity. From equity market's angle, key positives of the budget were:

a. Higher spends on rural, infrastructure and affordable housing

b. Focus on fiscal deficit and absence of any populist programmes

c. Also, no material changes in taxation, particularly related to capital gains

Measures to improve transparency in political party funding is a bold reform. Overall, it was a positive budget for economy and markets.

3. How do you perceive the government's demonetization move? What are negative and positive implications?

I think the demonetisation move is a part of the larger agenda of financial inclusion, better tax compliance and digitalisation of economy that the Government is following. The negative impact of demonetisation on economic activity is likely to temporary in nature.

4. What are the essential traits for the stocks to be in your portfolio?

We believe the investible universe can be divided into two broad sets: Higher quality set of businesses – companies that have compounding characteristics, good governance, better management quality, innate strengths in their business areas and superior capital efficiency.

Tactical opportunity set - Businesses having a basic standard of quality, which may make a good purchase at a certain valuation. This is the other set of companies that we track for trading gains.

Within these two sets, our bias is towards companies in the first set. I prefer businesses that are scalable, have secular growth opportunities and have better capital efficiencies.

We do buy stocks from the second set as a tactical play, when we feel valuations are in our favour and there could be some catalysts present which could cause the valuations to be rerated.

5. How are the market positioned to face global clues? Share your views on global economies and their impact on India?

There are many uncertainties on the global front such as the US Fed's interest rate outlook, policies that the Trump administration will follow, political uncertainties in Eurozone, etc., which can impact of market sentiments. However, the heartening feature of global economy is that economic growth seems to be recovering almost across the world. Most global research houses have forecast that global economic growth for 2017 is likely to be the strongest since 2011.

6. Is India still an attractive investment destination?

India remains one of the fast-growing economies among the large economies of the world. Also, Indian economy continues to be attractive from a longer term of structural point of view. Key features of Indian economy such as strong demographics, a balanced economy without significant overdependence on exports/ investments / consumption, high savings rates and low indebtedness of households, low penetration levels in many goods and services, all make Indian economy a very attractive proposition for the long term.

7. Which sectors you are considering attractive from investment point of view and why and which sectors you are avoiding and why? What kind of stocks never enters your portfolio?

We believe in the next two years three themes are likely to play out: Higher capex by Governments and public sector companies – We are playing this through cement, select industrials and construction companies and select Public sector companies.

Impact of GST resulting in market share shift in favour of organised players – We are playing this through select consumer and auto/auto ancillary companies.

Higher share of financial savings as we are playing this through select retail oriented banks.

In addition, we have added to our exposure of corporate banks as we believe even some resolution of corporate stress cases would improve their situation. We are also overweight select pharma companies on a bottom up basis. We are equal weight metals. We remain underweight on IT, NBFCs and telecom.

8. How often do you re-balance your equity allocation?

Typically, we don't take large cash calls in the equity portion of the balanced fund. Our equity investment ranges from 70-75% of the fund. If by capital appreciation, equity portion exceeds 75% of AUM, we tactically book profits. Similarly, in a market correction, if the value of equity portion goes down, we add to our equity weight.

9. What would you like to advice to the investors in the current scenario? What strategy would you suggest the investor to adopt at this point of time in the market?

We are positive on the Indian equities continues over the medium term. The Indian equity story is structurally very attractive due to factors such as its demographic profile, low household debt levels, scope for increasing share of financial savings within the total savings pool, increasing urbanization. The macroeconomic fundamentals remain strong and earnings outlook is improving. At current valuations, investors should adopt the systematic approach and use any volatility in markets to their advantage by making a larger allocation to equities.

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