India, we believe, will stand out as an oasis of growth in a slowing world economy. It is this belief that makes us want to buy into corrections like the present one. But, how solid is our own growth story? Are we staring at a new avatar of policy paralysis, with the Parliament's monsoon session getting washed out? How can we have a sustainable recovery when the rural consumption story is looking so weak? Is there really good on ground business momentum or are we continuing to live on hope? Tushar gives us a reality check on what's happening on the ground in our economy, and how he is positioning his fund house's equity funds to align with current economic and market realities.

WF: The Government's inability to pass key economic legislations like the land bill, GST and labour reforms is being seen by some experts as a significant negative to the structural growth story. To what extent does this pose a risk to long term growth?

Tushar: There was a lot of euphoria that was created at the beginning of the term for the new government that to my mind priced in a lot of expectations not least on reforms. The logjam in policy making, the enormous problems concerning the economy at that time pushed the market participants to expect a change for the better. The current delay on key reforms while frustrating the market in the short term has not derailed the agenda completely. It is a well-known fact that for change to occur in a massive country bedevilled by chronic bureaucracy it cannot happen in a jiffy. Parliamentary processes add another dimension to the whole exercise. While the intent of the government cannot be doubted the market is restive about the tardy progress so far. While the market waits for big bang reform, an upturn in key economic indicators in the interim may also provide a much needed breather. While this delay does not a pose a risk to long term growth, a complete U-turn may have ramifications.

WF: With the consumption story - especially in rural India - looking weak, how strong and sustainable is the cyclical recovery likely to be?

Tushar: Cyclical recovery is largely dependent on Industrial Activity picking up and not so much on rural demand. Industrial activity will kick off only after interest rates stay low longer (if they reduce substantially in the first place) and if reform and investment demand kicks in too. Urban consumer demand is looking strong especially in durables and that is not a worry at this time.

WF: Are you seeing evidence on ground of strong business momentum in any key economy sensitive sectors?

Tushar: There is a perceptible increase in orders on Roads following higher allocation in the Union budget. We are also seeing a lifting of the mining ban and lower commodity prices spur interest in metal converters. Ports and small infrastructure is also seeing some signs of growth. Export oriented sectors driven by a weaker rupee are also expected to do well this year. There is enough momentum to suggest that a reasonable recovery is on the cards for FY17.

WF: While domestic experts are happy with the sharp fall in commodity prices, international experts seem to be warning of deflationary pressures on the horizon. How real are these concerns and to what extent can they impact our growth story?

Tushar: Commodity prices do hurt Indian producers but India is a mix of producers and converters. While margins in user industries are zooming, producer of base metal products have seen the same plummet. On the whole these concerns are not too troubling to the India growth story in general.

WF: What is your outlook for equity markets over the next 12-18 months? Between large and midcaps, where would you be relatively overweight now and why?

Tushar: Equity markets are not reacting to lower earnings numbers and that may suggest a hope rally is in effect. The emerging markets (EMs) area too is looking weak and India may seem a bright spot in a darkening scenario. Domestic investors also seem to be positive on the markets on the basis of decent past returns. However we do think on pure valuations the markets are trading at a multiple or two higher than their 15 year average. Be that as it may, a significant increase in earnings may solve the equity valuation premium puzzle in the coming year. Mid cap indexes are at all-time valuation highs and large caps are relatively lower than their historic peaks. This suggests that the opportunity is more attractive on a risk reward basis in large caps. However on a stock specific basis we do find attractive opportunities in midcaps as well.

WF: How are you positioning your equity funds in terms of thematic and sectoral preferences now?

Tushar: Our flagship funds are positive on financials, consumer discretionary, Information technology and select industrials while we are negative utilities and telecoms.

WF: What are some of the key changes you have made this calendar year in your sectoral views, in response to evolving economic and market trends?

Tushar: Key changes to our fund positioning includes reducing our tilt on cyclicals and increasing our weight in healthcare. This was in response to a weakening currency and strong demand for generics. A delayed rate reduction cycle too has tempered our view on interest rate sensitives.

WF: What are the key risks that investors should bear in mind when investing in equity now?

Tushar: As always investors in equity should bear in mind that this asset class performs better than any other asset class over the long term. And long term could mean over 5 years at a minimum. Volatility is a feature of the markets and not something to be scared of. Asset allocation is the key to sound investing and keeping all your eggs in one basket or trying to time the market can be lethal to your financial health. It is imminently advisable to seek the advice of a qualified financial advisor before making allocation to equities in a serious way. Happy investing.

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