The record flows into mutual funds in recent times has to do with the interest rate and inflation environment in the country, feels Anand Shah, Deputy CEO & Head of Investments, BNP Paribas Mutual Fund. Excerpts from a telephonic interview:

Have the June 2017 quarter results been as per your expectations?

The June quarter was always going to be tricky due to the GST implementation. And in line with the expectations we have seen a de-growth in earnings. The impact of negative operating leverage has weighed on the companies.

But I would not take the June quarter results alone and arrive at conclusions. I would like to take it along with the September quarter. Though July was not up to the mark, I am expecting some restocking in August.

Ahead of the festival season, September could see good pick-up in sales. To that extent, the September quarter may have a positive surprise.

How different is today’s market from 2007?

Markets in 2007 had a tailwind in the form of good earnings. This time, half the market (Nifty) has got earnings growth and the other half, de-growth. The half that has earnings growth has got re-rated, trading at a higher PE.

The other half has corrected, though not to the extent of earnings de-growth, probably on hopes of a recovery. Hence, it is unlike 2007 where everything was rallying. From 2013 till today, we have had events that are macro-positive but earnings-negative.

Demonetisation, GST, lower fiscal deficit, asset quality review, lower commodity and oil prices — these are macro-positive but earnings-negative.

Now our belief is that we are entering a phase where macros will deteriorate a bit. Inflation will go back to 5-6 per cent levels; to that extent, nominal GDP growth rate, which used to be 14-15 per cent in India and had fallen to 7-8 per cent, will inch back to 11-12 per cent. This is what equities need.

Which sectors have potential for growth, going forward?

The sector where we have the highest conviction is banks which are strong in retail lending. Today, when the banking industry credit growth rate is 4-5 per cent, we have retail-oriented banks that are able to do 15-20 per cent or even better.

Re-stocking post the GST transition and pick-up in nominal GDP will lead to improvement in credit growth. Hence, there will be a positive surprise in loan book growth for banks than what the expectations are today.

Low-cost housing, infrastructure, irrigation, new cities, smart cities, are in focus. For all this, cement will be consumed. This sector can surprise positively in terms of demand and top line.

Your largest funds — the BNP Paribas Equity and BNP Paribas Mid-cap — have AUMs of only about ₹800-1,000 crore even after having been in existence for more than 10 years. Is it a conscious strategy to keep the size small?

It is only 6-7 years since BNP took over Fortis. Before we took over Fortis, we were more oriented towards the institutional size of the business. Retail was something we were not strong at. But we have consciously invested in both the teams over the last 6-7 years since we took over.

When BNP took over Fortis, the equity fund, whose size is over ₹1,000 crore today, was as little as ₹120 crore. Our entire equity AUM has grown ten-fold over the last 6-7 years.

In the last five years, our returns on the Equity and Mid-cap funds are about 500 basis points over the benchmark. If we can sustain this performance, with enhanced investment in sales and distribution, we can continue to grow faster than the industry.

Considering the record inflows into mutual funds in recent times, is equity gaining popularity among investors?

Unlike in 2007, we are not seeing frenzy. People appreciate that today options that are left for savers outside of equity are not too attractive.

Positive real rate of returns has made sure that financial assets outperform physical assets. To that extent there will be natural higher flow of savings towards financial asssets, which includes FDs, mutual funds, pension funds, etc. But within financial assets also, interest rates from FDs have come down.

Thus, the flows into mutual funds are not a culmination of markets moving up alone. It has to do with the interest rate and inflation environment in the country.

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