Vetri Subramaniam, UTI Mutual Fund, talks about which stock segments he favours now

India’s growth trajectory has been consistent over the past two decades and many firms have performed well across cycles, Vetri Subramaniam, Group President & Head of Equity, UTI Asset Management Company tells ET Wealth.

How do you expect the US-China trade war to play out?
The US-China trade tussle is more than just about trade deficit. It reflects a change in US policy towards China whereby China’s rise is being treated as a strategic threat to the US position in the world order. Our perspective would be to think of this as a long drawn chess game much like the Cold War. Regarding trade tariffs, it would be in both parties’ interest to avoid outright escalation. The markets are not pricing in a serious escalation that could spread to issues beyond trade, impacting currency and capital markets.

What do you make of the narrow market breadth and how has it distorted valuations in the frontline indices?
The market breadth has been rather narrow. However, a ‘market at equilibrium’ is a textbook concept. There is always some distortion. Today, we are discussing the contribution of certain heavyweights to the performance of benchmark indices. But not too long ago we were discussing the massive outperformance of mid- and small-cap stocks to the frontline indices. The shoe is now on the other foot. The challenge is that we can never be sure of how long a distortion will continue before the forces of mean reversion kick in.

Trailing PE valuations of indices are slightly misleading due to the large provisioning by the banking sector. In the current context, forward valuations, with all the attendant risks implicit in forecasts, may be a better indicator. However, even forward PE valuations of the benchmark indices are at a premium to the long-term average.

Are you finding more attractive ideas from the broader market at this juncture?
For a long time leading up the last quarter of 2018, mid-caps traded at a PE premium to large-caps. That premium has now eroded and mid-caps have reverted to a discount to large-caps on a forward basis. This is now more in line with the long time average. There is no longer a top-down valuation reason to avoid mid-caps. In the broader market there are names across the market capitalisation spectrum where we have a degree of valuation comfort.

Should investors keep faith in the sputtering consumption theme?
We think rising consumption and changing patterns of consumption accompany the positive long-term expectations for economic growth and incomes in India. But, even structural trends are subject to cycles and there is little doubt that consumption is now showing signs of strain. Valuations in this area have been demanding for some time. As the stocks correct their valuations, we would be open to looking at them, but this is still quite early in the cycle.

Which market segments or themes are you favouring now?
The positioning in UTI Value Opportunities Fund reflects where we find the best mix of valuations and growth. We are overweight on IT and also utilities. We have raised our exposure to pharma where we find that valuations are looking more reasonable in the face of poor news flow. We are underweight in consumer staples. We are also underweight on materials, oil and gas. We are more open to adding mid-caps as valuations get attractive.

Should investors worry about aligning their portfolio depending on how the political scenario turns out?
We think India’s growth and policy agenda have followed a reasonably consistent trajectory over the past two decades. That is the bigger picture investors should keep in mind.

Further, many of our portfolio companies have demonstrated the ability to grow over economic cycles and different governments. That gives us comfort. As and when required, we fine tune our portfolio but attempting large-scale portfolio changes in response to political outcomes is risky.

Are you in favour of putting sector caps in major stock market indices?
Free float weighted indices reflect the character and construction of the underlying listed companies in the market. It takes into account the floating stock and liquidity profile of the underlying companies. The index serves as a signaling mechanism of the health of the market.

We feel it is better to allow benchmark indices to reflect this without applying subjective sector caps. This is in line with global practices and standardises the comparison of market performance across different geographies.

Capped indices might reduce concentration risk but could raise float and liquidity risks. As an active manager, it also raises the issue of what should be the appropriate benchmark for active funds—unconstrained or capped indices. This might also make it harder for investors to understand the difference between the performance of the index and passive funds and active funds.