Stocks

High earnings growth needed for market rally to sustain: Ajay Tyagi

Suresh P Iyengar Mumbai | Updated on September 13, 2021

Ajay Tyagi, Head-Equity, UTI AMC

At valuations higher than long-term averages, the markets need a constant dose of positive surprises, says UTI AMC’s Head-Equity

Inflows into equity schemes have been hitting a new high despite investors booking profit at frequent intervals. The number of fresh systematic investment plans opened in August touched a new high of about 25 lakh with cumulative inflow of ₹9,923 crore when uncertainty continued to cloud economic growth prospects. Ajay Tyagi, Head-Equity, UTI AMC, shares his thoughts on markets with BusinessLine. Excerpts:

Do you think the run-up in market is sustainable?

The markets have seen a run-up on account of multiple factors such as liquidity, expectations of earnings revival and increased retail participation. However, for the markets to sustain, it is imperative that we witness double-digit earnings growth through FY22 and FY23. At valuations that are significantly higher than long-term averages, the markets need to be on a constant dose of positive surprises.

What would be the impact of US Fed rate hike on Indian equity markets?

It is highly probable that the initial impact of the Fed rate hike is going to negative. As cost of money increases, it usually leads to a risk-off environment. Since emerging market equities are far right on the risk spectrum there will be negative consequences for all emerging markets, including India. However, in the medium to long term, profitable growth is the biggest driver of equity markets. Therefore, in the short term Fed rate hike could be negative, it is the economic growth and earnings trajectory that will decide the market direction.

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With so many new players entering the MF business, will the market share of established players shrink?

The mutual fund industry is still at a nascent stage in India as the penetration is low and that is why new entrants are still coming in looking at the long growth runway. However, not everyone will be able to get successful and like almost all other industries, the 80-20 rule will be applicable here as well. The top few players will remain dominant and control the lion’s share of the profit pool of the industry. Rather than just product differentiation and cost advantages, it will be the ability of mutual funds to create sustainable wealth for investors that will drive their market share. This, in turn, is a function of sound investment processes, long-term orientation and ability to stay focused on products that truly create long-term wealth.

Should investors bet on small-caps given recent fall in prices?

It is evident that the increase in valuations of small-caps has been swift and they are now trading significantly ahead of their long-term averages. While every investor should have an allocation plan guiding him on investments into various categories of funds, at this juncture it is prudent to steer the allocation towards large and flexi-cap funds. However, this does not mean that one should completely exit small-cap funds, we are merely suggesting caution and therefore incremental tilt towards large-caps.

Do you see revival in corporate earnings continuing?

While input prices have risen across the board, we expect some of this to subside in the coming quarters as global commodity prices cool off. Having said that, we are always interested in owning businesses that have pricing power to pass on the higher input cost to the customers and therefore defend their profitability. In fact, for such companies, some amount of inflation is good from a growth perspective.

Will the RBI stick to accommodative stance as inflation is on the rise?

The RBI is an inflation targeting bank. It has set an inflation target of 4 per cent and has given itself an elbow room of 2 per cent on either side. If inflation remains higher than the RBI’s comfort level of 6 per cent persistently and the MPC expects it to remain high, they would be forced to act. At that stage reining in inflation could become the priority of the central bank over accommodating growth. However, if inflation remains below 6 per cent, the accommodative stance is expected to continue.

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Will domestic growth momentum be impacted due to the third wave of Covid in the US and Japan?

The impact of incremental waves on global economic activity has been waning. In fact even in India, we have noticed that the impact of the second Covid wave on economic activity was much lower than the earlier one. Therefore, we do not see much impact to our exports. One must also realise that India is basically a domestic consumption-driven economy and exports in any case do not move the needle a whole lot.

Published on September 13, 2021

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