If investors had reduced their equity exposure over the past five years, this may be the best time to increase it, according to Anoop Bhaskar, Group President & Head – Equity, UTI Mutual Fund . Excerpts from an interview:

The market has been polarised, with only a small set of sectors performing well. When can we expect broader participation?

In sectors such as telecom where the intensity of competition has lessened, the margin up-tick will be faster over the next two or three quarters. In commercial vehicles, the longest down cycle lasted for 15 months, in 2000-01. This time, it has already crossed 17 months of decline in sales on a year-on-year basis. That’s another sector where we feel the bottoming-out process will be faster. Light engineering and capital goods is another sector where there has been a slowing down for 18 months. A combination of rupee devaluation and more exports could actually see them move closer to the bottom or come off from the bottom over the next two or three quarters.

How long will the party last for defensives ?

We need to make a judgment call on whether a price to earnings ratio (PE) of 36 is high or could it go up further before it falls. What will impact these valuations is when the near-term earnings appear to be less consistent than what they have been in the past.

A standard deviation of 2 is considered the norm for being in bubble territory. Most of the FMCG companies are at 1.5-1.8 times standard deviation to the average valuations of the last ten years. In pharma, companies have delivered strong growth over the last two to three years and expectations for FY14 and FY15 are also strong, leading to significant upgrade in the sector's PE. At today’s valuations, they trade at less than 1 time standard deviation. The rupee depreciation gives them natural buoyancy in case of a slowdown in domestic growth.

Is it the right time to bottom fish for low valuation stocks?

If people can lose money in spot exchanges, why not try their luck with equities? Why we have become wary of equity funds is that the last five years’ returns don’t even match that of liquid funds. The level of participation in equities by retail investors is as low as that seen in 2001-02. I am not saying there is a major scope for a bull-run like in 2003-08. But for investors who want to ensure that the equity markets don’t leave them behind and who are not able to time their entry, this is a good time to start doing an SIP.

In terms of asset allocation, how much should be apportioned to equities?

India is at a stage where housing is of paramount importance for the middle or upper middle class. Assuming that between 40-50 per cent of the allocation is tied up in housing, the amount available for financial saving is only 50-60 per cent. In that, you have to take out a bit which goes towards gold for marriages, and so on. So, you are left with only 30-40 per cent of the savings. To assume that an investor will invest beyond half of this in equities is foolish. Once you bought your house and it is paid for, investors could have a higher proportion of equities in the portfolio. So, I would say that 15-20 per cent would be a good allocation for equity.

UTI Opportunities appears more large-cap oriented than sticking to the ‘opportunities’ theme which has more mid-caps….

Normally, the fund does not take exposure to stocks with market cap less than Rs 4,500 crore. Because of the size, we want to have liquid names. That is given to us more by having large-caps. Our endeavour is to increase the Rs 4,500-7,000 crore market cap names in our portfolio, but we have the normal constraints of not going beyond 42-44 stocks.

With the US markets expected to do well, will India see further outflows?

The general consensus today is that US equities are the best place to be in. But usually, the general consensus is wrong. This trade is getting crowded. My worry is that the expectation that the US will do well has, in turn, built high expectations on earnings growth. That is where it could stumble. The corollary to this is that the expectations for emerging markets are negligible or negative right now.

So, anything done by emerging markets over the next 12-18 months will surprise positively.

It is the expectation rather than the valuation that matters.

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