Mid-caps can offer good returns in the next 3 years: PVK Mohan

Q&A with the Head of Equities, Principal PNB Asset Management Company

P V K Mohan

In conversation with Surabhi Roy, PVK Mohan, Head – Equities, Principal PNB Asset Management Company shares his views about the road ahead for equity markets, corporate earnings performance in FY16, depreciating rupee and retail participation in mutual fund industry. Edited excerpts:

Indian markets are in correction mode when most of its global peers are trading at multi-year highs. What strategy should investors adopt in current scenario as the benchmark indices have seen a sharp correction of 10%? Where do you project levels for Sensex and Nifty in the near term?

It is difficult to make predictions for the market levels. What we could say is that this correction is a good opportunity for investors looking to invest with a 2-3 year view as the projected improvements in the economy and corporate profit growth would show some improvement in the second half of FY16 and pick up substantial momentum in FY17. Having said that, we would also add that investors must be prepared for volatility in the market and the possibility of further downside of 5%-7% cannot be ruled out.

Corporate earnings performance in the latest March quarter has been weaker than expected. What trend do you foresee for the first quarter of the current fiscal?

We expect slight improvement in the near term earnings momentum but a more visible pick up would be back ended in FY16 and more pronounced in FY17.

How much more pain can we expect from the depreciating Rupee and volatility in crude oil prices?

It is difficult to predict levels but the general expectation in the market is that there would not be any large adverse movement from these levels. But frankly, this is tough to call as these would be driven largely by global considerations.

Are the markets fully factoring in the likely impact of a sub-par monsoon?

It is too early to call for a sub-par monsoon as there have been conflicting predictions from Skymet and IMD. A better picture may evolve in the next 30-45 days. The markets have partly factored in this concern.

Principal Growth Fund has been one of the top performers among the multi-cap category with over 50% return in 1-year. What is your approach in fund allocation and are there any kinds of stocks that you always avoid in your portfolio?

The focus is on building a portfolio of stocks with good growth prospects over the next 2-3 years, financial stability, dominant players within their respective sectors. While we do have a top-down view of economy and sectors, the portfolio construction is more bottom-up and hence tends to focus a lot also on valuations at which the risk-reward is attractive.

Do you think retail participation in equities will continue? Where should investors place their bets in 2015-16?

We believe there is a compelling story in equities for investors with a 2-3 year view. The near term correction and consolidation phase offers long term investors who are under-invested in equities to increase their exposure.

Should one look at the mid-cap segment at the current levels? Are there any sectors / stocks that are worthy of investment at the current levels?

For long term investors who can take that additional risk and deal with volatility, good mid-caps offer potential for good returns in the next 3 years. Mid-caps tend to be all about being in the right stocks, with the right fundamentals and hence is very stock-specific. There are large numbers of opportunities, especially in the domestic-oriented sectors such as construction, auto ancillaries, select financials, cement etc.