Redemption pressure for the industry could increase: Taher Badshah

Frontline indices could potentially see the downside of 5 - 7 per cent from current levels, says the chief investment officer for equities at Invesco Mutual Fund

A steady fall in markets since the past few weeks has left investors wondering what the eventual bottom could be. TAHER BADSHAH, chief investment officer for equities at Invesco Mutual Fund tells Swati Verma that frontline indices could potentially dip another 5 – 7 per cent from the current levels. Edited excerpts:

How do you interpret the recent market moves in the backdrop of global and domestic developments? Where do you see S&P BSE Sensex and Nifty50 indices by the March 2019-end?

Broader equity markets have been showing weakness since nearly the start of the calendar year 2018 (CY18) in response to steadily deteriorating macro factors, such as commodity prices, interest rates, current and fiscal accounts and currency. In this backdrop, elevated valuations, notwithstanding improving earnings growth, left very little room for error and is the key reason for the recent sharp correction in the market. Frontline indices could potentially see the downside of 5 – 7 per cent from current levels, at which they will likely trade very near to their long-term earnings multiples.

The IL&FS contagion has hit the banking and non-bank financial companies (NBFCs) hard. Should one use the correction to buy any of these stocks?

Recent correction in the NBFC space will likely open up interesting investing opportunities in this segment. However, it will be important to recalibrate the growth expectations from companies in this sector versus their recent past and re-examine valuations for such revised growth expectations in judging their investment attractiveness. NBFCs will likely get meaningfully differentiated from one another on the strengths of their underlying business models hereon.

What has been your investment strategy this year?

Our investment strategy has been largely led by bottom-up stock picking, helped by our proprietary investment framework and driven by individual fund mandates. Consumer discretionary, financials, technology and industrials have been our key focus sectors. Barring our asset allocation fund, our portfolio cash levels typically do not exceed five per cent under all circumstances.

Flows to mutual funds have moderated over the past few months. Do you see a trend reversal?

Investor confidence does appear to have been modestly dented in recent months, evidenced by some slowdown in monthly flows into mutual funds, though not of an alarming magnitude. While monthly SIP (systematic investment plan) flows remain strong, lump-sum flows will likely take some while to regain momentum and would coincide with receding market volatility.

Are you facing any redemption pressures in any of your schemes?

Our equities business has maintained reasonably strong positive momentum in recent months. Redemption pressure for the industry could increase in a scenario of further meaningful macro deterioration from current levels.

What's the biggest headwind for the markets now?

Key anxieties in the equity market today largely revolve around domino effects arising in the credit markets and a potential deterioration in consumer sentiment leading to slowdown in consumption growth. Investors would also like to be watchful of election outcomes in key states over the next two-three months.

Your view on corporate earnings growth for FY19 and FY20?

In view of prevailing micro and macro uncertainties, it would be prudent to keep growth expectations in check. While base effects, currency gains on exports and global cyclicals do provide growth support, what we would like to see are conditions that enable a meaningful improvement in the quality and consistency of earnings growth for the Indian corporate sector.

You have launched Invesco Small Cap Fund in a year in which small-cap index is down by over 20 per cent. Do you believe that the correction has driven small-caps to attractive valuations?

Yes, the ongoing correction in the market has made select companies in the small cap segment attractive from valuation perspective and we believe that investors should take this correction as an ideal opportunity to invest in small-cap funds.  Our investment strategy for Small Cap Fund is purely based on bottom-up stock selection with preference for companies that demonstrate higher growth prospects; are available at reasonable valuations; have distinct competitive advantages – which along with virtuous cycle of growth in the market can transform into meaningfully large companies over time, and for high quality businesses characterized by attractive return on capital, ability to generate free cash flow and capable management.