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A unique perspective on this market cycle

Manish Gunwani, CIO - Equity, Reliance Nippon Life MF

In a nutshell

Manish - RMF's new equity head - has a unique perspective on the ongoing market cycle, which he says is likely part of a larger emerging markets bull cycle which began in early 2016 and looks good, based on historical trends, for at least another 1-2 years. Check out Manish's perspectives on how we should read this market cycle, on why current stretched Indian valuations may not pose a threat to our participation in the larger EM cycle and the themes that RMF is overweight on as it strives to maintain its top quartile performance of 2017 into the next year and beyond.

WF: You have a very interesting take on the emerging markets cycle and where we are right now in the cycle. Can you please take us through your perspectives on this?

Manish: If we look at history of emerging markets for last 30-40 years, it does look that they move in phases lasting for 4-6 years. In these phases, typically a weaker dollar coincides with an emerging market bull phase and vice versa. The theoretical reasons for this are primarily as follows:

  1. Generally emerging market currencies have fair amount of dollar denominated debt which is easier to service when dollar is weaker.

  2. Quite a few emerging market currencies are officially or unofficially pegged to the dollar. So when dollar depreciates, it makes monetary conditions loose in these economies.

Looking at the trajectory of dollar against EM currency index, it peaked out in Feb 2016, post which all emerging market markets have done well. Most of the economic data is turning around for emerging markets and given the history of 4-6 year cycles, there could be another 1-2 years left if this is the average of emerging market bull run. Of course there is nothing sacred about the length of each bull run and based on various global and domestic developments it could play out differently.

WF: While emerging markets seem to be mid-cycle and have perhaps at least 2 more years to go for the cycle to turn, Indian PEs at 26x FY18 earnings are looking quite stretched. How do we reconcile these two?

Manish: There are few points to consider here:

  1. A multi-year bull run can have fairly sharp corrections like in May 2006 where midcap index lost 25% roughly even in the long bull market of 2003-8.

  2. Earnings are likely to be at a trough with CAGR of 3-4% for Nifty over last 5-6 years. Ifthey compound at healthy double-digit growth for next 2-3 years, market may not look very expensive.

  3. Also, globally interest rates are lower for the kind of growth we are witnessing;so some shift in valuations upwards could be attributed to that.

WF: What is your market outlook for 2018? Can we expect double digit returns or should we brace ourselves for a mean reverting correction?

Manish: In equities, it is difficult to get the short term right - in general we think on a three year basis double digit returns are likely as earnings compounding can offset the higher valuation we are starting at.

WF: What are the broad themes you see driving business momentum in India over the next 2 years?

Manish: We are optimistic that growth in lot of segments of Indian economy will pick up due to:

  1. significant pick up in global growth.

  2. government making growth a priority now as seen in PSU bank recap, GST rate exemptions etc.

  3. Next 15 months likely to see hefty election related spending due to both state and general elections.

  4. Low base of capital and consumer discretionary related sectors due to slow down over last 4-5 years.

WF: Which sectors are you optimistic on now and why?

Manish: Sectors we are overweight include:

  1. Large banks where credit cost is high today due to corporate lending as we see the asset quality stress improving over next 1-2 years.

  2. Industrials in segments which are likely to see quick recovery if economy revives.

  3. Pharma where we think earnings are likely to bottom out in FY18.

WF: How has 2017 been for Reliance MF's equity suite?

Manish: The year has been fairly good for our funds. Most of the fund returns are in the top quartile, with many funds having generated 5-10% alpha over market indices. We had positioned most of our funds to gain from a reasonably favourable environment, and had overweight positions in domestic-facing businesses. The strategy has worked out very well, as reflected in the scheme performance across categories.

WF: What changes are you making to your equity suite to align with SEBI's product rationalization initiative?

Manish: Most of our funds will have their current positioning continuing post the rationalization exercise. We have submitted our comprehensive proposal to the Regulator, and are awaiting feedback on the same.

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