The Govt of India is launching the mother of all financial reforms GST on July 1st and the whole world is eagerly watching as to how this greatest Tax reform is going to roll out. In an exclusive e mail interview to Nanayam Vikatan, Nimesh Shah, Managing Director and CEO, ICICI Prudential AMC, the largest fund house has dwelt in length on various aspects of this reform and it's impact on the market which is given below.
1.What is your view on the current situation of Indian Economy?
We are positive on the Indian economy as a whole and believe that the economy is poised to do well over the next five years. Currently, Indian macros like oil prices, inflation, Current Account Deficit, and Fiscal Deficit have all improved, backed by political stability. Additionally, the Government too is increasingly focusing on initiatives which hold the potential to bolster the various pockets of the economy, thereby working towards establishing a good economic environment. The focus is also on easing the issues in banking sector, which can be a positive step for the long term. Understanding the problem is the first big step to the solution. We believe, the Government has understood the problem and is looking towards a long-term corrective action.
2. What is your take on the current market valuation?
On a price-to-earnings basis, the market is expensive while on price-to-book basis it is tad above fair value. On market cap to GDP basis, the market is currently near its long-term average. To sum it up, Indian equities are no longer cheap.
3. What will be the impact of GST on the market?
The implementation of GST we believe will usher in long-term benefits which could be huge. In terms of earnings, the first signs of the impact can be gauged in FY19. However, there may be a case of some near term negatives during the transition phase.
4. The Indian Mutual Fund Industry’s AUM had crossed the milestone of Rs. 10 Lakh Crore for the first time in May 2014 and in a short span of around 3 years the AUM size has crossed Rs. 19.26 lakh crore in 2017, April. What is your expectation for the next 3 years? Will it double ?
The mutual fund penetration in India is among the lowest at 12% of GDP when compared to 55% in terms of developed economies. Over the next five years, we expect 15% CAGR rise in Assets Under Management (AUM) especially in the share of equity AUMs. SIP book is also expected to grow. Over the past few years, we have seen growth in SIP book from Rs. 1800 cr in March 2015 to Rs. 4200 cr in April 2017.
As an AMC we believe the category of equity hybrid/dynamic asset allocation funds which can benefits out of volatility may see substantial interest. We expect this category to grow upto Rs. 5 lakh crore in the next five years.
5. During FY 16-17, a total amount of Rs. 43,921 crore was collected through SIP with about 1.35 crore SIP accounts. What are the reasons behind this growth?
Mutual Fund industry has come a long way from where it was five years ago. Today retail investors know what an SIP stands for and the potential it holds for wealth creation. This increased understanding about SIP is largely as a result of the various investor education initiatives undertaken by mutual fund companies. Even the media has been supportive in directing investors to the right set of products and helping all the stakeholders to create awareness about Mutual Funds and SIPs.
6. After demonetization and GST which sectors are likely to benefit more?
Demonetisation combined with GST reduces the proportion of cash economy and ushers in white economy. These initiatives have lent a helping hand to the organized players especially in those sectors where the unorganized players held a sizeable market share. Consumer, construction, chemicals, logistics are some of the sectors which will stand to benefit of the GST reforms.
7. Growing NPA is a great concern and threatens the growth of economy . Is it safe to avoid bank or financial sector stocks?
Banks thus far has suffered double whammy of low growth and high NPAs over the past few years. However, we believe going forward things are likely to brighten for this sector. We are bullish on corporate banks particularly the private sector ones and select large PSU banks.
This is because we believe the valuations of corporate banks are still close to their historical average in most cases and if the business environment improves as anticipated, there is scope for valuation re-rating for banks. That combined with better profitability should lead to good returns for the sector.
8. With many reforms being introduced, going forward in the next 3 to 5 years, which Sectors are likely to benefit?
We believe in the infrastructure theme. Within infrastructure we are positive on power, road construction and telecom. Also, cement is another space which can gain from the affordable housing initiative of the Government. IT and pharma are two pockets which have been sluggish for the last one year and can be a value buy over the next two years.
9. You said that on a PE basis market is expensive and in that context investing in equity or mutual fund - which will be the best?
Given the current market conditions, within mutual funds, dynamic asset allocation fund is the apt category to consider investing in.
10. What is your expectation of return on equity mutual funds in Long Term? (5 years, 1O years)
Over the last ten years, the return of Sensex and Nifty has been 8.01% and 8.51% CAGR, while large caps category average in the meantime has delivered 10.82%. Meanwhile on a five years basis, the returns for the benchmark indices have been around 14% while the mutual funds average has been over 17%, as per Value Research data. This clearly shows that equity mutual funds have helped investors to grow wealth. Recent past performance has also been encouraging while other asset classes such as gold and physical assets have not seen much interest. At this point we would like to reiterate that investors should not invest looking solely at past performance but invest with a long term horizon for wealth creation. (Data as on May 30, 2017)
11. In current market situation, what is your advice to retail investors?
In the last one year, the market has already rallied over 15% and is no longer cheap. In such a market scenario, there are chances of bouts of volatility. So, an investor entering the market or incrementally allocating money to equity funds should ideally consider investing in Dynamic Asset Allocation Funds, as these products help manage volatility well. Such funds invest in equity or debt as per the relative attractiveness of asset classes (equity and debt). When equities are attractive, the fund allocation increases towards equity in order to tap into the opportunities available and vice versa.