The year that went by caught the investors off guard with equity market indices delivering poor returns and eroding investor gains completely in some cases. Stepping in to 2019, even though the first half is rife with uncertainties, there is hope that the remaining part of the year may see better times for the equity markets supported by earnings recovery.
In an exclusive interaction with RupeeIQ, Anand Shah, Head-Investments & Deputy CEO- BNP Paribas Mutual Fund is helping us understand the market outlook better. Shah joined BNP Paribas Asset Management (BNPP AM) in March 2011. With over 17 years of extensive experience in asset management and handling diverse portfolios, Shah is a sought-after markets expert. He is responsible for managing the investment team and the performance of all onshore portfolios and offshore mandates sub-advised by the business. As Deputy CEO, he oversees the sales team along with his investment management responsibilities.
Let’s start the discussion with understanding, how was the past year for BNP Paribas as a Fund house?
The year gone by was more or less in line with our expectations. The micro economy recovered from the initial teething issues related to GST implementation and demonetisation-led shocks with consumption picking up and acceleration in government spending. However, at the same time, India’s macroeconomic variables declined ‘marginally’ from the unsustainably lofty levels witnessed in 2017. In 2018, equity markets were volatile as expected. But a sharp correction in mid and small capitalisation companies surprised us. A slower than expected earnings growth disappointed us. While top line growth was in line with our expectations, growth in profits was disappointing.
What was the most challenging scenario or an event in the past year for BNP Paribas MF? Was it regulatory changes like scheme categorisation or managing investors’ concerns regarding scheme performance or something else? How did you deal with those challenges?
As stated earlier it was a challenging year for equities. We have seen a few large cap stocks driving the index performance for the large part of the year narrowing the market breadth. This also led to underperformance of active funds against their respective benchmark. Also, correction in mid and small caps, change in long term capital gains tax in the union budget 2018 coupled with profit booking added to the market woes. As an AMC, we weren’t challenged much by the reclassification either on the investments side or on the product suite. We successfully implemented the changes wherever required in order to comply with the new norms.
It has been a difficult year for equity investors of BNP Paribas MF. To what would you attribute the below expectation performance of equity schemes and how long will it be before investors see a recovery happening?
We have made necessary changes to our portfolios which are now reflecting in our near-term performances. We remain confident of the recovery as our portfolios are closely knitted by our investment philosophy, BMV – Business, Management and Valuations. This focusses on the businesses that grow faster than the economy and the industry growth rates. This is a first filter, we then focus on the management leadership to see if they are gaining market share, how they are building moats around a business or protecting it, how they allocate capital, plan for succession, respond to disruption etc. Once a business filters through these two filters, we focus on valuations. We never go the reverse by owning businesses that are cheap. This strategy has helped us well across cycles and should hold us good in the longer term.
We have seen inflows to mutual fund Industry reduce in the past year, what are the chances that this trend will reverse in the coming year?
Flows are always difficult to predict and we avoid hazarding a guess on the same. Moreover, domestic investors have been more mature in this cycle by participating more through SIPs route at varying market levels (not playing it by momentum). These are healthy signs and points towards build-up of a good domestic pool of capital to be accessed in the longer term. That said, we think benign inflation outlook, positive real rates and lacklustre performance of other traditional asset classes should keep investors inclined towards domestic mutual funds.
What is your outlook for year 2019?
We believe that calendar year (CY) 2019 will be a tale of two halves, making stock selection a key for outperformance; hence we called this year as “Year of Selection”.
We expect the first half of CY2019 to witness multiple events which will keep markets more focused on macro variables. However, we believe that in the second half of the year, micro factors will take the centre stage, making stock selection a key for outperformance. In our view, the first half of CY2019 will have four key events, among many, to watch out for.
- The US Federal Reserve monetary policy stance: Focus will mainly be on the pace at which rates are being hiked (two rate hikes indicated as per the latest Fed meeting outcome) and the pace of balance sheet unwind.
- The US-China led trade war: This could have a bearing on large (as well as related smaller) economies – hurting their competitiveness, capital allocation, resources and economies of scale.
- Crude prices: This year we are expecting to see some certainty emerge around crude prices. With OPEC+ production cuts and slower demand growth globally, crude prices might stabilise, which could help market participants and businesses make smarter decisions.
- The upcoming General Elections in India: This will chart the way forward for India over the next five years, as it will determine the political party and ideology at the helm of the country.
In the midst of uncertainty, the underlying economy will continue to be in a recovery mode. Over the last four years, the economy has witnessed the implementation of several ‘framework’ reforms which have disrupted the economy in the short term. However, we believe these initiatives are likely to fructify in the longer term, helping the economy deliver a stronger and more robust growth.
Past year we saw investors choosing large caps over small and midcaps. This year, according to you, which capitalisation will be preferred by investors?
We believe mid-caps do look attractive, but unfortunately there are no straight answers in equity because we need to be also cognisant of the fact that we are not talking about one stock. We are talking about 100-300 odd stocks in mid-caps. We will have to be selective within the mid-caps also. Having said that, from a broader perspective, we have had underperformance of mid-caps as compared to large caps and to that extent valuations have been reasonably fair. Secondly, we believe that the tail-winds of economic recovery led by consumption continue to benefit smaller and mid-size companies more than large-size companies in terms of earnings growth. We believe earnings growth trajectory remains strong in the mid-caps. Combination of higher-earnings growth and more reasonable valuations make us believe that mid-caps are today fairly priced and from here on risk-reward is favourable for mid-caps.
Mid-caps have underperformed the large-caps by 19% and small-caps have underperformed the large caps by almost 32% on a broad benchmark basis in CY2018 (referred to indices as Nifty Small Cap 100, Nifty Midcap 100, Nifty 50). Individual stocks correction has been much sharper, so the valuations premium of mid and small caps have corrected and the fundamentals haven’t changed much. So, the combination of superior growth and more reasonable valuations today make them attractive.
What is your assessment of growth in equity as an asset class for this year?
Financialisation as a theme has been an ongoing one in the Indian markets and structurally, we believe this will continue – like in most other countries. Gold and real estate i.e. physical assets have historically been hedged against higher inflation levels and as we tackle that, these asset classes have been out of favour. If volatility increases to extremes in the financial markets, then one might see some move towards these asset classes, but the longer-term structural move towards financial assets (mostly equities) is likely to continue in our view, given RBI is committed to ‘inflation targeting’ and ‘positive real rate of interest’.
What would be your advice to retail investors?
While we can have volatile moves in the market in 1HCY2019 (Jan-Jun’19) due to macro events, we believe equity markets will be supported due to strong earnings recovery. And hence, other conditions remaining the same, we do not expect large corrections in equity markets. Investors should avoid making investment decisions influenced by the greed and fear due to market volatility and should consider continuing their long term ‘goal based’ asset allocation into the markets.