As mutual fund investors redeem their investments in fear of a big correction, Harshad Patwardhan, CIO-equities, Edelweiss Asset Management, says, “We have learnt that in Indian equities (as in other emerging market equities) one should always be mentally prepared for a meaningful correction. Instead of getting unnerved by them, disciplined investors can actually benefit from these factors.” Edited Interview. This year has started with the Sensex touching new records. Let’s begin by speaking about the strategy for 2021. How do you plan to navigate this market in this New Year?2020 proved to be a year of unprecedented disruption both in scale & scope. Year 2021, hopefully, will be a year where things start to normalize. Company fundamentals will again start to matter more than exogenous events and consequent policy responses. Economic cycle- which was suddenly disrupted in 2020- will begin to play out again. We plan to navigate the markets over medium term by positioning our portfolios for the impending cyclical upturn in the economy. We will also be refocusing on our core strength of bottom-up stock picking after briefly having to deploy strategies to deal with virus induced shock last year.Pharma funds were the star performers of 2020. Similarly many other sector funds like IT and international funds did extremely well. What’s your outlook for these sectors this year?We expect Indian economic activity to accelerate and corporate earnings growth to transition to a higher trajectory over medium term. This will be a big change compared to the last few years when Indian economy was decelerating, and corporate earnings growth was lackluster. Consequently, we expect traditional defensive sectors such as domestic pharma to underperform the broader market. IT services sector will be relatively better placed due to expected demand buoyancy but might still struggle to outperform cyclical sectors given their current valuations.Very difficult to generalize for International funds as they are of different kinds. However, odds are emerging market focused funds will likely deliver better performance than the ones focused on developed markets. However, do not forget that India is one of the bigger emerging markets and we expect domestic equities to do well over medium term after below average performance over the last several years.On the inflation front, how do you see things going ahead? What is your assessment for the next two quarters?We expect inflation to start inching up driven by higher commodity prices and also due to demand improvement in the economy. However, we do not expect inflation to reach alarming levels. We should remind ourselves that moderate inflation is actually a good thing for earnings growth and equity markets. Also, we do not expect central banks to act aggressively to tame inflation as the policy focus remains on inducing and sustaining growth in the economy at least in the medium term.One thing everyone wants to know- budget expectations. So, what are your expectations from the Budget 2021? Do you think mutual funds will see some sops this year?I am aware that the media tends to be very focused on the budget day. However, in my view, the salience of the budget day has diminished over the years. Announcements on key economic policies happen round the year.Also, indirect taxation related issues are tackled on a separate forum. In addition, the government announced new corporate tax rates just last year. So, I don’t expect much on the taxation front. I also have no specific expectation from the budget on mutual funds.But there is one thing I would like to see in the budget. As we know, Indian government did not provide any significant fiscal stimulus to the economy last year (in contrast to many other countries). Of course, Indian government did not have much leeway given the already high fiscal deficit and high debt levels. However, now that the economic activity has started rebounding, it will be nice to see a nudge to the economy in terms of a moderate fiscal push to help sustain the momentum.Another question that investors are asking a lot- do you think we can expect double digit returns from equity mutual funds this year?Predicting market return over a specific period is very difficult as it is a function of myriad variables, with each having its own probability distribution. However, it is fair to say that at present there appears to be a confluence of positive factors: (a) bottoming out of domestic economic activity, (b) better than expected performance of corporate sector, (c) benign domestic & global monetary policy, and (d) improvement in risk appetite among foreign investors. It is, therefore, probable that equity returns over the medium term could be better than the lackluster returns witnessed over the past several years.Are you expecting a big correction in the near term?A big correction is not our base case. However, over the years, we have learnt that in Indian equities (as in other emerging market equities) one should always be mentally prepared for a meaningful correction. Corrections can be triggered by internal as well as exogenous factors and can have fundamental and/or technical reasons. In any case, most are inherently unpredictable. We should always keep in mind that volatility and corrections are part of the game. Instead of getting unnerved by them, disciplined investors can actually benefit from these factors.What is the one advice you will give to equity mutual fund investors for 2021? Over the past few months, we have seen a very interesting phenomenon with respect to flows in Indian equity markets. Foreign institutional flows have been robust with November 2020 reporting perhaps the highest ever monthly FPI inflow. However, domestic institutions have been constant sellers, primarily due to redemptions faced by domestic mutual funds. As explained in response to earlier questions, we see good odds of Indian market performing better over the medium term than it did over the past few years. We therefore believe it is rather risky to be underweight on Indian equities compared to one’s model asset allocation. We urge mutual fund investors to review their asset allocation and at least correct any underweight position they might have as the opportunity cost could be high.
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