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Business News/ Money / Calculators/  A trend towards thematic funds has started emerging
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A trend towards thematic funds has started emerging

Ravi Gopalakrishnan of Canara Robeco AMC gives a sense of where investors are investing these days

Sameer Joshi/MintPremium
Sameer Joshi/Mint

Equity markets have risen consistently this year. But macroeconomic indicators have still to show signs of genuine improvement. Market experts, though, are encouraged and see corporate earnings improving and the economy turning around. Are retail investors investing in equity funds? If so, which categories are getting money? And what can be done to better investors’ experience than the one they had in 2007-08? Ravi Gopalakrishnan, head – equities, Canara Robeco Asset Management Co. Ltd decodes the markets and gives a sense of where investors are investing these days.

Is the stock market euphoria justified?

Yes, we believe that the excitement in the equity market is well justified. At present, the Indian economy has twin-engine support—an economy that bottomed out in the financial year (FY) 2014 and a decisive election mandate by the electorate in favour of reforms and economic growth. In addition, the headwinds of the past two to three years (high inflation, current account deficit, fiscal deficit, and so on) are on the receding trajectory and this provides a ground for potential monetary easing by the Reserve Bank of India (RBI). The equity markets ideally thrive in this expected mix of improving economy and monetary easing as the earnings growth and high valuations will follow.

Given the scenario, India is all set for a ‘secular macroeconomic recovery’ over the next three to five years. We expect India to achieve a target of 8.5% gross domestic product (GDP) growth, and the equity market will reflect that growth.

Even if we see the valuations, our markets are currently trading at around 16 times one-year forward earnings and are just trading above the historical average. During bull markets, we have seen price-earnings (P-E) of markets peaking at nearly 22-23 times. Once we see growth touching 8%-plus in the next few years, we might see P-Es expanding, which will have a positive impact on market valuations.

If the markets and valuations are indeed looking good, do investors understand it? We aren’t seeing retail equity folios going up significantly.

Investors are beginning to understand the potential of the change in the macroeconomic environment. We have already seen a reversal of the trend in net redemptions to net inflows over past two to three months, and we expect the momentum to pick up as investor education and communication efforts starts to pay off. Unfortunately, the market run-up has been very fast and it barely gave investors an opportunity to get in. Once markets enter a consolidation phase, which we believe it is in currently, we will see retail investors coming into the markets.

As an equity fund manager, what are your key takeaways from the 2007-08 experience? Is there anything different that the industry or fund managers can do this time around to ensure that when markets go down in future (after the bull run gets done), the pain would be lesser than before?

When we analyse the issues over the past five to seven years, problems in 2007-08 had essentially started from the developed nations and affected all emerging markets, including India. Problems in India got aggravated due to excessive growth ambitions of companies (high leverage and over-ambitious growth plans) and lack of adequate policy initiatives from the government.

I believe the issues of the developed nations have been addressed and based on available commentary from policymakers in the US and the euro zone, the economies have largely stabilized. As regards to the Indian scenario, I believe, corporate India has gone through major restructuring. Corporate balance sheets are being restructured through various means such as asset sell-offs, equity raising and operationalization of assets that were constructed over the past five to seven years. Thus, the overall environment looks better from an investment perspective.

As regards to the lessons learnt from the past, yes, a lot has been learnt about implementation and execution issues in the Indian context. The high expectations and assigning euphoric valuations to companies would moderate. I am sure that these lessons will be well digested and acted upon in a prudent manner, and emphasis will be given to risk-return evaluation framework while evaluating companies and constructing portfolios.

Where are retail investors investing these days among equity funds? Where do you see inflows coming in the most?

Retail investors have been more inclined towards mid-cap funds in terms of the market capitalization curve, and infrastructure-oriented funds in terms of themes.

With the macroeconomic situation stabilizing and a strong and decisive election mandate, corporate India is likely to witness significant change. Quality mid-cap companies that have been able to weather global headwinds, have restructured their balance sheets and are likely to emerge much stronger than before, even potentially becoming future large-caps.

Despite the sharp run up, midcap stocks are trading at a reasonable discount to large-cap stocks. Hence, there is renewed interest in mid-cap funds.

Further, with confidence in the equity market slowly returning, the trend towards thematic funds has also started emerging.

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Published: 18 Aug 2014, 07:02 PM IST
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