In an interview with BusinessLine , G Pradeepkumar, Chief Executive Officer of Union Asset Management Company, spoke about the recent market recovery and the possible headwinds going ahead. Pradeepkumar has an overall experience of more than 28 years in investment funds business in India and abroad. A BTech with a PG diploma from IIM-Ahmedabad, he has worked with IDFC Investment Advisors as Chief Marketing Officer, UTI Asset Management Company as Senior Vice-President and UTI International as Director & CEO. Excerpts from the interview:

How do you look at the recent recovery in the market? What is your outlook?

The recent recovery has largely been driven by monetary actions by banks across the world, including in India. As per our internal analysis, the market is trading at a reasonable discount of 15 per cent to its fair value. While value is available across market capitalisations, large-cap stocks seem to be attractively discounted.

In terms of outlook, the market would witness volatility in the near term. But our view for the next three to five years is very positive.

Do you think the market bottomed out in the month of March?

When the market crashed in March, stocks were attractively valued at about 25 per cent discount to fair valuations. That is why there has been a speedy recovery. Even if the market crashes again, such a level of discount, as witnessed in March, is unlikely to sustain. Smart investors see huge value and pick up the stocks at such discounted rates.

Is this a good time to look at mid- and small-cap stocks?

We will not advise the mid- or small-cap to be the core of anybody’s portfolio.

One should be stock-specific in this space. For every multi-bagger in the mid- or small-cap space, there are probably at least 10 stocks that would have perished. It will be a huge mistake if you see a stock that corrected by about 30-50 per cent and think it is a good value. This is because certain stocks have fallen for good reason.

We advise investors to take the fund route because identifying a good mid- or small-cap stock would be a tough task for most investors. We recommend taking exposure to multi-cap funds as they give exposure across market capitalisations.

Which sectors do you fancy at this point in time?

We like IT, healthcare, communication services and utility sectors and we are underweight on consumer discretionary, consumer staples and financials. Even when the economic activity picks up, people are likely to be a bit conservative about how they spend their money and discretionary spending is likely to come down. Thus, the fair value of these companies is likely to take a bigger hit.

But one has to be cautious about items categorised as discretionary, as some of the items which were considered discretionary in the past may become essential in the future. For instance, two-wheelers may become essential in the future, as having a private vehicle is being preferred over public transport now.

What types of mutual fund investments need to be revisited now?

Exposure to sector-specific funds require reassessment. Because no sector, no story runs forever. Sector story is cyclical and keeps changing. If an investor parked his/her money in any of the sectoral funds thinking it is offering good prospects, now is the time to re-evaluate.

We advise investors against taking exposure to sectoral funds. Most retail investors, probably, enter at a right time but may not be able to exit when the sector story is over.

Pros of investing in sectoral funds can also be reaped by investing in multi-, large-, mid-, small-cap funds, because the fund manager would have definitely given overweight to the promising sector and would exit when the story is over, which would be difficult for retail investors.

At this juncture, should an investor hold cash or will he/she be better off investing in equity?

If investors have enough liquidity, then it is definitely a good time to invest in equity.

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