Significant shift to equities at these valuations not advisable: Vetri Subramaniam

Interview with Chief Investment Officer, Religare Invesco MF

With stock indices off their recent peaks, value investing opportunities are few. Vetri Subramaniam, chief investment officer, Religare Invesco Mutual Fund, believes the current valuations are at a premium to the long-term average. He tells Chandan Kishore Kant this might not be the right time to make significant allocations to equity. Edited excerpts:

The markets are slightly off their peaks. Is it a good time to start a nibble?

The Nifty is down only four per cent from its all-time high. This is hardly a correction. There has not been a single pullback of 10 per cent since this rally started in September 2013. It is impossible to predict when and where a correction will come but just because we don’t know when and how does not mean that it will not or cannot happen.

What do you advise investors who missed the rally?

We do not look at it in that manner. Right now, valuations are at a premium to the long-term averages — they are not expensive but neither are they cheap. To make a big asset allocation change, we think investors should be guided by valuations. For investors contemplating a significant allocation to equity, the advice would be that this is best done when valuations are trading below the long-term averages. That is not the case right now. So, stay with systematic investing. The best time to shift allocation away from equities is when valuations are extremely expensive. The crucial point is that allocation shifts should be guided by valuations, not by outlook and sentiment.

There are concerns over valuation in the mid-cap space. After a strong rally in the mid-cap counters, is there enough room left for further upside?

Mid-caps normally trade at a discount to large caps. Right now, they are trading at a premium. Therefore, the valuation support for mid-caps is not very compelling. Having said that, we believe in equities, mid-caps in particular, the key generating an alpha over the long term is stock selection and patience. For mid-cap companies, this is more important than economic and market valuation cycles.

With regard to the economic cycle, we think profit growth could be higher in mid-caps as economic growth picks up. Over the longer term, mid-caps have delivered higher returns than large-caps, with higher volatility.

Is this a stock-specific market or are there sectoral plays available?

In the shorter term, the market exhibits different cycles but over the longer term, stock selection plays the larger role in generating alpha. Given where the valuations are, the emphasis in the short term should be on growth. Over the longer term, the best opportunities would be in economy-sensitive sectors such as industrials, financial and consumer discretionary. But the returns are a function of starting valuations and hence we cannot ignore the risk posed by valuations.  

Amid concerns raised by the Reserve Bank in the latest credit policy, mainly about inflation, how do you see the growth story and its impact on stocks?

RBI is on the right track with its focus on inflation. The weakness in the global economy and falling commodity prices will, hopefully, aid the inflation to RBI's targeted glide path. For the economy and the markets, it is preferable that RBI succeeds in its battle against inflation before the government succeeds in restoring growth. We do not see any immediate rate cuts but in the long term, a low and stable inflation rate is key to establishing India's competitiveness.

Do public sector units, banks in particular, offer value at this juncture?

We like banks with a strong liability franchise and a clean lending book. And, certainly not a loan book that is opaque. These banks would be best placed to grow and compete effectively in the market when growth revives. Healthy capital adequacy to support growth is a necessity. Very few PSU banks score well across this range of factors.

How much preference do you give to defensives? What call do you have on pharmaceuticals?

Indian pharma companies might not fit the 'defensive' tag any more. They're growth companies, driven by generic drug exports to developed and developing markets. We have always viewed this sector bottom-up because the difference between companies and strategies is acute. We like several companies on a bottom-up basis in the sector.