'One should be prepared for a 10-15% correction' | Economic Times

Mid cap investors are overjoyed. They managed to pocket great returns in the last year. But they are also little worried about the market. Shivani Bazaz of ETMutualFunds.com spoke to Aniruddha Naha, Senior Fund Manager- Equity, PGIM India Mutual Fund, for his views on the market, especially the mid cap segment. “It is unlikely that any other asset class will be able to match the returns which equities will generate over the next 3 to 5 years. Hence, investors, both existing and new, if one wishes to create wealth and has money which one doesn’t need in the near future; should invest with a longer timeframe,” says Naha. Edited interview.PGIM India Midcap Opportunities Fund has managed to offer 98% returns in one year. What was the strategy? The fund follows the GARP (Growth at a reasonable price) as a framework, and growth is the next three years earning CAGR. The strategy has been to buy businesses where the valuations are justified by the earning growth over the next three years. Hence, both reasonable valuations and strong earnings visibility play an important role in stock selection. The strategy is to keep doing the groundwork in an attempt to identify sectors early and give the sector decent allocation in the fund. The fund is constructed with 40-45 names in most cases and when we like a business, we allocate decent weightage to reflect our conviction.The scheme has bet heavily on healthcare, technology, engineering, construction, chemicals. What was the thought behind the investments?The fund has a decent exposure to IT, healthcare, capital goods and material, which includes chemicals, cement.The decent allocation to IT was based on the adoption of technology globally, which would need wide scale implementation. Covid has accelerated technology adoption and this transformational change would be a great opportunity for Indian IT companies.The fund has a decent exposure to healthcare. Healthcare in India has been ignored at household levels. Post Covid, there should be increased awareness of healthcare requirements and households will ideally cut down on other discretionary spends to create a healthcare buffer for any future exigencies. Healthcare should gain importance at every household.Corporate India is today mostly deleveraged and balance sheets are strong. Capacity utilisation levels are also pushing up post the 2nd Covid wave. We believe there could be a corporate capex cycle starting, as utilisation levels push up, which would benefit a lot of capital goods companies.The positioning in chemicals is to capture the China +1 theme, which we believe will play out over the next few years, though one needs to be careful about valuations. We expect real estate to revive, which along with the demand from infrastructure should drive strong demand for cement. That explains our stance on cement.The valuations are quite steep for some of these sectors. Do you still believe there are value picks in the market?Valuations generally are expensive, but the strong earnings growth momentum over the next couple of years across sectors should be able to justify the premium valuations. The earnings visibility over the next couple of years could be one of the strongest seen over many years.Investors are overjoyed as the mid cap space has given bumper profits after a lull period. How do you view the performance? The performance of the midcap category has been strong over the last 18 months. The performance has to be seen in the light of the fact that the midcaps had corrected sharply during the Feb- March 2020 correction. If one takes into account the quality of the businesses, the strength in earnings and the fact that the rally is on a corrected base of early 2020, one can continue to expect decent double digit returns CAGR over the next 3 to 5 years.Everyone is talking about an impending correction. What is your view?Globally, there are risks building up, with regards to incremental liquidity, interest rates, taxation of corporates, supply chain disruptions, etc. In the light of this, it is natural to expect a correction in the backdrop of a strong rally. One will never be able to predict the timing and extent of correction. Given the risks which have been highlighted, one should be prepared for a 10-15% correction at any point of time and the trigger could be any event. Having said that, given the resilience of Indian corporates, the growth opportunities in the Indian businesses, it would be a good opportunity to build portfolios with a longer time frame in mind.What is your advice to new as well as existing investors in the mid cap space? Given the growth opportunities, the clean balance sheets and strong cash flows of corporate India, the formalisation of businesses due to demonetisation and GST, corporates should benefit from reasonable earnings growth. It is unlikely that any other asset class will be able to match the returns which equities will generate over the next 3 to 5 years. Hence, investors, both existing and new, if one wishes to create wealth and has money which one doesn’t need in the near future; should invest with a longer timeframe. One doesn’t need to worry about timing the correction, rather spend time understanding one’s risk and return profile and choosing a good MF scheme accordingly.