With the benchmark indices gaining around 26 per cent so far this calendar year (CY17), Sundaram Asset Management Chief Executive Sunil Subramaniam, tells Puneet Wadhwa that fund managers would find it tough to beat the market going ahead, as they would have more challenges to address. He expects a 15-20 per cent growth in the assets under management (AUM) for the industry over the next five years. Edited excerpts: What is your market outlook for the next one year? The markets are likely to consolidate till March 2018, given the political (Assembly election outcome, Union Budget) and the economic (policy meetings of the Reserve Bank of India and the US Federal Reserve) events stacked up. The current year cannot be taken as the basis for returns expected for the next year. There were two significant events – the government’s move to demonetise high-value currency and the implementation of the goods and the services tax (GST) Bill – that impacted corporate financials during 2017. Analysts will spend the next two-three months studying the balance-sheets of companies and guidance given by them to ascertain the impact and project earnings growth. We remain bullish on the markets for FY19, as we believe earnings would grow in high double digits. What are your earnings estimates for FY19? Earnings for large-cap companies is likely to grow 17-18 per cent. For the broader market (mid-cap), earnings growth should be between 18 per cent and 25 per cent in FY19. The markets are already factoring this in. That said, we expect 10-12 per cent upside in benchmark indices and 15-18 per cent upmove in the mid-cap index over the next one year. Do you think this time it will be driven more by political compulsions ahead of general elections in 2019? Politics and economics are no longer delinked. Earlier, a political Budget meant giveaways, while an economic one focused on investing. Job creation is the need of the hour. Even a political Budget, if aimed at creating jobs rather than giveaways, will be taken well. Money spent creating more jobs or enabling job creation is not a bad thing and the economy will be able to reap benefits over the long run. What is your interpretation of the latest macroeconomic data? I don’t think the economy is in a bad shape. We saw a dip in gross domestic product (GDP) due to specific events – demonetisation and GST. To say the economy is in a bad shape as the GDP has dropped from 7 per cent to around 5 per cent is incorrect. The economic growth will pick up over time. How will markets react to any spillage in fiscal deficit target in the Budget? There is no reason to worry about fiscal slippages.
I don’t expect this to happen; and even if it does, the government’s balance-sheet is strong enough to bear it. If the slippage is due to a higher infa spend, job creation, etc, the markets will not treat it negatively.Which sectors do you find comfort in, given the rally so far in CY17? We still believe that over the next one-year consumption and retail financials, whether private-sector banks or the non-banking financial companies (NBFCs), will continue to show a good topline and bottomline growth. From a three-five-year perspective, infrastructure, cement and corporate lenders should do well. Over the next one year, fund managers will start allocating more to these sectors. What’s your view on fund flows into the equity markets? It is difficult to predict FII flows. Money does not always chase growth, it also chases risk. India has been improving on the risk parameters, with the recent Moody’s rating upgrade, a drop in inflation, falling interest rates, etc. What decides FII flows is the relative valuation of other markets as well. India remains a good and attractive destination for FIIs and will get a reasonable share of their money. Domestic flows have picked up and are likely to remain healthy, given a shift to financial assets and lack of investment alternatives. How difficult will it be for your fund managers to generate return/alpha over the next few years? I don’t think the past record of generating around four per cent alpha (large- and mid-caps) and around 8 per cent (small-caps) is sustainable. The economy started to recover and there was a re-rating in terms of price-to-earnings (P/E) for the markets. Going ahead, it will now be the earnings and sectoral growth story that will play out and test the fund managers. There will be a slight reduction in alpha, say around 100-150 basis points (bps), across the board, as there will be more challenges to deliver on. What’s the road ahead for the mutual fund (MF) industry? India is underpenetrated in terms of mutual funds. The dynamics of the business are such that the smaller players find it hard to survive. So, consolidation will happen over time, with a few larger players tending to dominate the MF landscape over the next five years. That said, over the next 10 years, there will be a lot more room for players to come in. We can expect a 15-20 per cent growth in AUM for the industry over the next five years. What is your view on the Securities and Exchange Board of India (Sebi) move for consolidation of mutual fund schemes? It is a welcome step, as it will avoid duplication. Consumers and distributors get confused once they see two schemes with similar names but with different management styles. Sebi’s move is an attempt to make it WISIWIG (What You See Is What You Get). It will not lead to a reduction in the number of schemes as new spots will be available for fund houses to offer. We are ready with our plan and will be among the first to file. One can expect new fund offers (NFOs) in FY19.