Growth delayed, not denied due to Covid-19 wave: Axis MF's Jinesh Gopani

Markets believe growth will revive in the latter half of FY22, says executive.

Axis Mutual Fund is at the cusp of a new growth cycle by offering customers "one-stop shop" for investment, said Jinesh Gopani, Head of Equity, at the company. Gopani, in interview to Chirag Madia, said rising interest rates in the developed world could make emerging markets less attractive.

Why are investors shrugging off concerns around economic and earnings growth?

Growth has been delayed, not denied. Corporate earnings have been a good indication of latent demand from the previous lockdown. Markets are factoring a growth recovery in the latter half of FY22. A key aspect that has cushioned growth is policy action. Assurances from the RBI of accommodative monetary policy till durable growth returns is a big morale booster for the market. That is the reason markets have shrugged off the second wave impact and trade where they are.

The longer-term trajectory for growth gives markets confidence that growth will return sooner rather than later. Another key metric to monitor is the pace of vaccination. We have started to see initial signs of supply constraints being addressed by the vaccine manufacturers and the government. The speed of vaccination holds the key to when the country returns to normalcy.

At current valuations, have markets run ahead of fundamentals?

We have had a very good earnings season in the fourth quarter so far. Within our coverage, we have seen most companies outperform consensus estimates. Management commentaries have also been positive. On a one-year forward basis, we believe markets are reasonably valued. We (markets) are at the cusp of a long-term growth cycle and will likely be buffeted by tailwinds from the global economy, geopolitical shifts and robust domestic demand.

But analysts are scaling back your earnings growth expectations?

Earnings for the coming quarter are likely to remain muted due to the second wave. We saw a similar trajectory in the first wave. Long-term investors like us have discounted the minor blip in our assumptions for the year. We are optimistic about the new growth cycle and are fully deployed to capture opportunities as they arise.

Besides Covid-19, what are the other risks for the markets and the economy?

Inflation has been seen trending higher especially WPI numbers. A higher inflation number complicates the math for the RBI. Also, as global growth picks, rising interest rates in the developed world will make EM assets less attractive. These are two prime risks we are monitoring now.

What are some of your flagship equity funds underperforming?

Over the last few quarters, the markets have seen a beta-rally playing out across the beaten-down segments of the market. Our holdings are predominantly quality-oriented and fundamentally strong companies, which did not see material correction ergo limited scope for recovery. As long-term investors we have proven our mettle in investing in high-quality businesses that have been steady compounders over the long term. We retain our belief in our investment philosophy. The near-term underperformance should in our opinion give way to more consistent returns from our portfolios.

Where are you currently finding opportunities given the huge surge?

A few things have been very peculiar in this down cycle. Companies and promoters have been pushed to relentlessly cut costs and strive for efficiency. The large deleveraging cycle that has taken place over the last couple of years has significantly reduced fixed costs and improved the credit profile of companies. The impact has been seen in improved earnings and lower interest costs. High-cost debt has now given way to normalised debt costs and efficient borrowing. Another learning from the past is measured capex.

The last cycle saw mass capex across sectors, many a time with extrapolated business cases. The new capex cycle is more measured in its approach and hence we believe, sustainable. As I mentioned earlier, we are at the cusp of a growth cycle and companies which manage their balance sheets well and stress their assets optimally will be the likely long-term winners. Through our continuous evaluation and channel checks we believe our portfolios are populated with investment stories that may deliver long term investor wealth creation opportunities.

What is driving the optimism for small and midcaps? 

Small and midcaps, like their large cap peers, have seen a clear distinction between quality companies and the rest. This coupled with significant retail participation and interest have resulted in shares rebounding to new highs. Earnings in this space have been good selectively. Mid and small caps are stock specific stories rather than market stories and hence high-quality managers have been able to generate long-term wealth consistently. Our steadfast adherence to reliable investment processes gives us confidence in our portfolios and its capabilities to build long term investor wealth.

Which are the sectors/themes you are bullish and bearish?

We like the domestic growth story and hence have increased our allocation to cyclical stories with a growth bias. The portfolio today is aligned to what we believe are likely winners and hence rather than sectors we are following a more stock specific approach to investing.

Do you think there is a shift of preference from active to passive?

From a product standpoint, today we offer a complete range of solutions to investors across domestic equities, international equities, hybrids and fixed income. We lacked a complete range in the passives space and hence have embarked on a journey to identify and launch passive offerings selectively. There is sufficient room in the Indian equity markets for active and passive strategies. Our objective is to be a one-stop shop for all investment needs.