See greater comfort in largecaps compared to small and midcaps: UTI AMC CIO

Subramaniam says pharmaceutical and healthcare sectors are reasonably valued and are showing incremental improvements in their balance sheets

Valuations for the benchmark Nifty are in comfort zone but small and midcaps are expensive, says Vetri Subramaniam, chief investment officer (CIO), UTI Asset Management Company (AMC). In a telephonic interview with Abhishek Kumar, Subramaniam says pharmaceutical and healthcare sectors are reasonably valued. And, their long-term structural growth prospects are in place. Edited excerpts:

What is your view on the largecap space, considering its relative underperformance?

Going by our asset allocation frameworks, we are neutral on equities. The Nifty 50 is trading above its long-term average but is still within the comfort zone. On the other hand, midcap and smallcap indices are trading in the expensive zone. Hence, on a relative basis, there’s greater comfort in the largecap segment vis-a-vis smallcaps and midcaps. If you look at our balanced advantage fund portfolio, we currently have 60 per cent net exposure to equity, based on our asset allocation model. Over 85 per cent of the equity allocation is in largecaps. This reflects our cautiousness in midcap and smallcap stocks.

Which sectors are you bullish on presently? Any recent shift in sectoral positioning that you can point out?

From a CIO’s perspective, one area that we like is the pharmaceutical and healthcare sectors. The valuations are reasonable and the companies are showing improvements in their balance sheets. In addition, long-term structural growth prospects are in place. Two other areas where the equation is reasonable are automobile and financials. However, they are no longer cheap. They are in their mid-cycle valuation-wise, with further revenue growth prospects. The sectors that are not attractive are capital goods and capex-driven ones, owing to excessive valuations.

What's your take on the IT sector — is the pain over?

It is one of the few sectors where our track record is globally proven. The services export from India is more than our oil deficit. The sector got overvalued in 2021. At the same time, the industry entered a period of uncertainty owing to concerns of recession in the US. Despite the correction, the sector is still not cheap. We will look for opportunities to incrementally add IT stocks in our portfolios. The medium-to-long term prospects remain robust. In addition, the growth prospects of the sector seem equal or even better than the pre-pandemic period.

Any fund recommendation for investors considering the present market environment?
 

Given the higher valuations, hybrid funds like balanced advantage and multi-asset are better suited for lumpsum investments. In these categories, fund managers have leeway to increase or decrease equity allocation based on the market conditions. For staggered investment, investors should look at schemes, which invest across the market-cap spectrum. Flexicap, multicap and focused equity are some of the options.

UTI MF recently launched an innovation fund. Which areas have you identified for the fund?

We will look to invest in technology-driven sectors like e-commerce, fintech and deep technology software space. Some other areas will be specialty chemicals and research and development (R&D) in the manufacturing space. Another area is companies in the cleantech space.

What do you make of the Reserve Bank of India’s (RBI’s) report, which shows a plunge in net household savings? Is it negative for certain sectors?

It’s difficult to draw inferences from this report as it also includes the debt and savings of all unincorporated businesses. Hence, the pain reflected in the data could be due to stress in small scale businesses. It’s also possible that the significant increase in borrowings could be a result of better credit availability. More and more people and businesses are now getting access to credit from the organised system, leading to better data capture. We are not surprised by the data. Other indicators have already shown that.