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#BQMutualFundShow: 2017-Like Rally Unlikely This Year, Says Manish Gunwani

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Investors must keep expectations tempered this year as the stock market is unlikely to see a 2017-like rally, according to Manish Gunwani, chief investment officer-equity at Reliance Mutual Fund.

A return expectation of around 10-15 percent for the next three years is a reasonable one, he said on BloombergQuint’s weekly series, The Mutual Fund Show.

Watch the full interview here.

Here are edited excerpts from the conversation.

A lot of people, many of them CEOs of AMCs, they get people to start SIPs but many of them want to exit at the first hint of a drawdown.

Equity is an asset class which requires patience. Unexpected things keep happening. The more the time frame, the more the results converge to the mean that over the last 30 years Sensex is 13 percent and good funds will have an alpha above that. So the central part of our education is about telling investors to just stick the course for as long as you can.

As some who is investing such large sums of investor money, how do you approach a market like this?

My personal belief is that you can look at a lot of macro stuff like interest rates, commodity prices and you try to predict how the growth in the economy will pan out, how global growth will pan out. My realisation is if you just follow valuations, that’s the most reliable indicator. Look at stocks from a growth versus ROE versus valuation perspective and don’t try to overlay too much of a macro call on them. It typically works.

The valuations were a bit stretched three months ago. They are probably a bit better but still above mean. From a business cycle perspective, the good part is, you are entering a phase where 7-8-year growth rate in Nifty earnings has been 4 or 5 percent. Clearly, that is much below nominal GDP growth, much below the 20-30-year trend. So, it is quite likely that the earnings momentum is ahead, but how much to pay for that is bit of an art. I think the risk reward is equal. It is not a very cheap market. But because the likelihood that the earning momentum will be strong is reasonable, I think it is a middling kind of market at this point.

What is the artist Manish Gunwani thinking of right now?

It sounds like a big cliché, but you try to be as bottom up as you can. Optically nothing is cheap. So, try to get something which is optically expensive but if you can see something which others can’t, you go in. There are very few opportunities like that, to be honest, but we are trying to find them.

Is it possible to predict the kind of timeline when the turbulence may pass or we revert to the winning ways which we were used to in 2017?

It is important to remember that 2017 happened before 2015 and 2016. The cumulative gain for those two years was broadly zero for Nifty. So, clearly, it needs a base like that to give a year like 2017. The longer you look, the more things converge to the average. We have been telling investors to look at it from a three-year perspective.

Is the chance of three-year cumulative earnings growth on Nifty being 50-60 percent higher? I think it is. There is a good chance that cumulative earnings growth could be 50-60 percent in three years. Even if the PE corrects 10-15 percent, that’s the kind of low and mid-teens number which you should go with. Which of these will be 30 percent or minus 5 percent, it is very difficult to predict.

Would you be comfortable with the growth rates that you are penciling in, with the index valuations maybe 5-10 percent lower from these levels or you don’t think the markets need to fall as much as 10 percent to become attractive on a 2-year forward basis?

More than 5 percent, below 5 percent or higher, it’s about your three-year return expectations. If it is somewhere between 10-15 percent, I think you are fine. I think that’s the kind of return we will hit somewhere around that range. That return will happen because of the current PE. On a price to earnings basis, it is not a very cheap market. Price to book is a bit cheaper but still, it is not very cheap at this point in time. It is more about what expectation you come in with.

What if the market doesn’t give a significant upmove this year? What if this is a year wherein investment will happen, but it will not yield returns? Is that a strong possibility?

The culture of investment is improving. People are ready to give you a fair amount of time. Could this year be a year of zero returns, maybe yes? It is very difficult to time equities on a one-year basis.

From a global perspective, we are seeing a fair bit of recovery coming through. If you look at global composite data on PMI, IIP, 2011-2016 was a very soft period for the global economy. Last 5-6 quarters, we have seen growth come back. While the Indian economy is a bit insulated from global growth, because we have very large parts of the economy like agriculture which don’t have too much interface with the globe. The stock market earnings are not that insulated. We have lot of sectors like energy, metals, IT, pharma which don’t do much with India, it’s all to do with the globe. Historically we have seen that when the global growth cycles are strong, in 2003-2008, or before that in 1990-1994, there is a big tailwind to the stock market. This time that tailwind has been less than what I expected.

In 2017, there were a lot of reform-lead disruptions like demonetisation, GST, RERA. That’s why it is a bit difficult to figure out why, for example, Indian exports are not participating as much as they should. If it is a matter of time before the GST effect wears off and exports pick up, then I think we are fine. But if they don’t pick up, then I think there is a slightly bigger problem in terms of whether India has dropped out of supply chains of I.T. hardware and the leading global trade at this time. Those are the kind of things where we need to be careful when we look at portfolio construction, because a lot of do get colored by the 2003-2008 boom. But if you go back to that boom, then you will see that Indian exports where growing faster than global trade which we are not seeing in the last 5-6 quarters.

If you look at a slightly long-term economic history of India, 1998-2003 which was a soft period for the global economy, Indian trade broadly mirrored global trade. In 2003-2010, if we look at Indian exports versus global exports, we got a massive amount of market share. We outperformed global exports for a long period of time for a significant margins because lot of our export industries like iron ore, pharma, textiles – all those kinds of businesses did very well.

If you were an investor and not just a fund manager, would you be tempted to invest in thematic funds which might be available in better NAVs right now and have a higher probability of moving up?

The thing about a thematic fund is, one you need to get in, but you also need to get out at an appropriate time. Which is why one is a bit cautious about recommending them. Because you can get one leg right, but if the other leg is not right, you don’t make money. But as an entry point, infrastructure is a good space to be in. For a longer frame, pharma is a good sector to be in.

Is this a good time to invest a lump sum amount in mutual funds given where the markets are, or STP kind of scheme would be a better choice?

Usually, the answer would depend on asset allocation, but in case of a small amount, I would just say, maybe lump sum is okay. The markets have just corrected. Within the Indian context, we are not seeing any big return anywhere. In real estate, the inventories are still a bit high, the rental yields are not very high. I guess if you are getting a double-digit return in 3 to 5 years on a compounding basis, I guess it is not a bad return.

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