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Home / Money / Personal Finance /  Should you play on potential capex recovery via MFs?

In a recent report, a brokerage house predicted that the dream capital expenditure (capex) cycle might be finally unfolding. The expectations are that if the capex supercycle is actually realized, then good wealth creation opportunities can follow for investors.

Capex is undertaken when current capacity utilization and anticipated future demand are high. Essentially, companies estimate demand based on a variety of factors, and if the current setup is insufficient to meet that demand, it presents a case for undertaking capex.

Therefore, capex mutual funds are a way to bet on ‘India in investment mode’ theme.

Further, infrastructure funds are a way to bet on the capex cycle, and to put things in perspective, such schemes had delivered an average return of around 53% and 83% in 2006 and 2007, respectively. On the other hand, the top-performing theme of 2021, small-caps funds, gave 63% returns on average.

Antique Stock Broking Ltd believes that the dream capex cycle might be finally unfolding. “Strong global capex recovery, steady commodity cycle, low-interest rates supported by ample liquidity, and resurgent business confidence — all are leading towards a heady capex cycle in India," it said in a recent report.

The brokerage house expects nominal gross fixed capital formation (GFCF) to grow at a compounded annual growth rate of around 15% over FY22-27, with upside potential. The GFCF shows how much of the new value being added in the economy is invested rather than consumed.

According to experts, the government’s infrastructure push (National Infrastructure Pipeline), the performance-linked incentive (PLI) scheme and other reforms should augur well for the capex revival. Also, improvement in capacity utilization and benign liquidity and financial conditions, de-leveraging and strong profitability provide conducive conditions for capex revival.

“With economic activity expected to revive, increasing exports amid improving external demand and a China + 1 strategy, capex revival could pick-up in the near term," said Dhaval Kapadia, director–managed portfolios, Morningstar Investment Advisers India.

To be sure, India in the past witnessed some pockets where the capex cycle had been playing out such as chemicals and pharma sectors, among others.

However, according to Ashish Chaturmohta, director—equity research, Sanctum Wealth, currently, India is seeing capex coming from across the sectors, which is visible from the order books of companies such as Larsen & Toubro Ltd, Thermax Ltd, ABB Ltd, Siemens Ltd, ISGEC Heavy Engineering Ltd, etc. “Hence, the capex cycle is picking up you would see it growing for a couple of years from now," he said.

As per Kapadia of Morningstar India, sectors that are likely to benefit from the potential capex cycle are industrials, infrastructure, real estate, autos & auto ancillaries and financials.

However, investors should keep in mind that since capex funds are thematic funds, they can be risky as investments could be concentrated in a single sector or theme. Further, thematic funds may go through extended periods of underperformance.

“Also, the performance can be volatile (relative to diversified funds) depending on the theme playing out as per expectations and investors should be ready to ride out the volatility in performance," said Kapadia.

As per data from Antique Stock Broking, global capex cycle was strong during 2002-07 (11.4% CAGR), driven by China, India, Brazil, Russia, Turkey, Indonesia, Australia, Spain and Mexico.

However, the global capex cycle weakened over 2012-16, growing by a meagre 0.3% CAGR, primarily due to fiscal, monetary, liquidity tightening and Euro-zone debt crisis.

In India, infrastructure funds on average on a 10-year basis with a return of 13.70% have underperformed even the large-cap category with an average return of 14.62%, as per data available with ValueResearch, an investment research provider.

So, given the risks and return potential, should investors go for mutual funds betting on capex?

“A normal investor who wants to keep life simple should let a fund manager do the job and not play themes like capex, which are much, much seasonal. The entry as well as the exit is important. Anybody who played the infra theme in 2007, made a lot of money. But if you did not exit in a timely manner, then you did not really benefit from it," said Amol Joshi, founder of Plan Rupee Investment Services.

Instead of pure-play capex funds, Joshi suggests that multi-cap or a diversified flexi-cap schemes are best placed to play all the themes, including infrastructure. “If someone has risk appetite and wants to take exposure to capex funds, then in terms of allocation, 80% could be in core portfolio and 20% in satellite. So, within 20%, you can fit your thematic offerings, international offerings and precious metals. The 80% part should be the core part, which will be your typical diversified equity and debt portfolio," added Joshi.

While experts have painted a bullish outlook for the capex cycle, investors should keep in mind that risks to demand (local and global) amid potential new vaccine-resistant virus variants could hamper the start of the capex cycle. Also, higher than anticipated credit costs with the expected increase in interest rates could nudge corporates to be careful about planned capex with their expected return on capital in perspective.

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