In conversation with Prasanna Pathak, Head of Equity of Taurus Mutual Fund

Equity markets have become volatile now. How do you think mutual fund investors should approach such a market?   

Inflationary pressures, rising bond yields, concerns over high valuations, and tapering of flows to emerging markets have led to increased volatility in recent times. Investors should be willing to brace for 10 per cent-15 per cent fall in the market during the current ongoing uptrend. In fact, it would be considered healthy, given the sharp rise that we have seen. 

A minor rise in inflation is actually good for the equity markets as this is a sign that the growth is back. The entire purpose of the fiscal and monetary stimulus globally was to reflate the economy. Hence, small rises in inflation and bond yields may result in some corrections but may not damage the ongoing uptrend. However, one must be guarded against a major and sustained surge in inflation and interest rates. Hopefully, there’s still time for that!  

Valuations do look expensive but are based on depressed earnings as of now. So, it seems that the market is expecting the recent trend of better-than-expected growth. Besides, earnings may continue in the next 3-4 quarters and take care of the valuations. 

Hence, regardless of the volatility, we believe that investors should stick to the discipline of systematically investing in the markets. There is a high probability of equities outperforming other asset classes in the next 2-3 years. 

What is your take on the third-quarter GDP number of India and what is the growth rate that you expect for the entire FY21?  

The positive GDP growth reported in the third quarter was in line with our expectations. We do expect further improvement in the Q4 numbers. We expect FY21 to end up with negative GDP growth (contraction) of around 7 per cent. 

How will you rate the third-quarter earnings? Where do you see major hits & misses in terms of sectors?  

December was the second quarter after September, where the earnings were much better than analysts’ expectations. IT, corporate banks, metals and commodities, cement as well as capital goods sector have done well. There was some disappointment seen in the pharma, FMCG, and auto sectors. 

We think that the earnings momentum should broadly continue in March quarter, albeit with some impact on margin-front due to inflationary pressures. 

In terms of categories (large-cap, mid-cap & small-cap), which of these looks more attractive now from a 3-5 years’ perspective?  

There is a case for outperformance by mid-caps/small-caps over the next 2-3 years. The long consolidation by mid-caps/small-caps from the year 2018 to mid-2020, the expectation of revival in earnings, cheaper valuations on a relative and historical basis are some of the factors that may lead to outperformance. 

Many companies in the segment seem to have reduced leverage, become leaner, and taken up cost-saving initiatives, and consolidated their positions for almost 3 years. So, if growth comes back over the next 3-4 quarters, we will see a good amount of operating leverage for some of the companies in the segment. The valuations on a relative and historical basis are not very much demanding, given the current economic cycle. Hence, we tend to be constructive on some of the mid-cap stocks from a medium to long-term perspective. 

What should be an ideal asset allocation for the moderate risk-taking investor now?  

Asset-allocation depends on many factors such as age, risk appetite, financial goals, time horizon, etc. and varies from individual to individual. Having said, a moderate risk-taking investor may have the following asset-allocation (excluding real-estate). Equity 40-60 per cent, FD/fixed income 30-40 per cent, and gold 10-20 per cent.