Stocks are in expensive zone, investors need to exercise caution: Sachin Trivedi, UTI AMC

Sachin Trivedi, Fund Manager and Head-Research of UTI AMC in an interview explains investors, whether new or experienced, should bear in mind that equity is a highly volatile asset class. The best approach to this market is to stick to a long-term asset allocation strategy and avoid trading on a day-to-day basis. Over the long term, equities have provided a higher relative return.

What are the reasons for inflows in equity funds?

India’s equity asset under management (AUM) to GDP is at a low single-digit (close to 5%), and it is much below the global average  (of ~34%). I believe this contribution has been increasing over the past few years, and the trend should continue. Equity as an asset class has been outperforming other asset classes (be it gold, fixed deposit, or real estate) in terms of real returns.

With improved awareness, allocation towards this asset should keep improving. Yes, last financial year, the industry has registered outflow. Post deep correction in February and March 2020, lumpsum investments were negative, but SIP flow was steady. However, we should remember that past returns play an important role in future allocation. The last one-year outcome (the fiscal year 2021) would reinforce that confidence that equity as an asset class has provided better returns when compared to other available options.

As the market is at its peak, do you think valuations are expensive for investors?

In the context of a valuation matrix-like price to earnings, broader markets and many stocks are in an expensive zone, and investors need to exercise caution. However, it is also true that earnings performance has been weak for the last couple of years, barring fiscal year 21.

In the last few years, earnings performance was affected by factors like clean up in banking balance sheet, liquidity crunch in NBFC’s and related impact of other sectors, demonetisation, and finally GST related adjustments. The benefit of some of these actions should be visible over the next couple of years.

When we look at broader market earnings estimates (Bloomberg consensus), they are projected to grow at a healthy double-digit. Therefore, investors (medium and long term) should focus on the big picture, which is improving earning trajectory. Over time, the valuation matrix will catch up with the improving earnings.

What should be the course of action for new and existing investors?

Investors, be it new or existing, should remember, equity as an asset class is volatile in nature. The way to approach this market is to follow a good asset allocation strategy and not trade on a short-term basis. Over the long term, equity as an asset class has given better relative return. My suggestion to the investors is to firm up an asset allocation plan and regularly rebalance the portfolio.

This discipline will help them to achieve their long-term goals. An investor following this strategy would have already seen appreciation in the equity portfolio resulting in increased allocation to this asset class. Keeping expensive valuation in mind, they should look to reallocate from equity to the other asset class and bring back allocation to the intended level.

Which sectors are doing good?

If we evaluate market performance from an earnings perspective,  we have seen earnings upgrade in the last few quarters. And these upgrades have been primarily on the back of better cost management.

Some companies/ sectors have also seen a better demand environment. Sectors like technology and consumer-facing companies and specialty chemicals are posting healthy revenue growth, and we expect this to continue for more quarters. But performance of sectors like autos and non-banking financial companies’ was weaker.

Within sectors like auto, passenger vehicles and tractors have registered good demand, but two-wheelers and commercial vehicles have faced challenges. However, we expect the demand environment in the sector to improve and provide pricing power to the companies, resulting in better-earning outcomes in the future.

Should one invest in sectoral funds and thematic funds?

Sector/Thematic funds are focused on one to few sectors and inherently carry more risk. But if the investor understands the dynamics of the sector well, they can generate higher returns. The sharper focus of the fund manager in the sector also allows them to track and invest stocks across the market cap, opening the potential for a better return. But investors should have the right mix of allocation towards diversified and sector/ thematic funds. Ideally, the maximum allocation towards these funds should not be more than 15% to 20% of equity allocation.