With the BSE Sensex near all-time highs, fund managers, rather than being cautious, are buoyant. Swati Kulkarni, Executive Vice President and Fund Manager at UTI Mutual Fund, is one of them. She sees immense value in the market at the current levels. "Valuations are still attractive. The Sensex is trading at a one-year forward price-to-earnings (P/E) ratio of 14.5 times, and we will be a buyer in this market," she says.
The eighth edition of the Business Today-Morningstar Asset Allocation Survey vindicates this market sentiment. No fund manager is bearish; in fact, 60 per cent of them are bullish at the current levels. None of them expect the Sensex to fall below 26,000 points. A majority of them - 58 per cent - expect it to be around 30,000 to 32,000 points in the next six months.
Five quarters ago, in the third BT-Morningstar survey, only 15 per cent fund managers had expected the Sensex to go above 20,000 points; a majority of them (46 per cent) had said it would be around 18,000 to 20,000 points. But despite the Sensex rising, no fund manager expects the average P/E ratio to cross 20 times forward earnings in the next six months. While 62 per cent expect it to hover between 16 and 18 times, 31 per cent said it will be around 18 to 20 times.
Fund house participation
The fund managers sounded optimistic. "Looking three years ahead, I would invest 50 to 60 per cent of my money at the current levels," says Mahesh Patil, Co-CIO at Birla Sun Life Mutual Fund. He says that although the index is near all-time high levels, valuation parameters are below the 2008 highs. "Valuations are in line with the long-time average of 15.7 times," says Patil. According to Sonam Udasi, research head at Tata Mutual Fund, the market is nowhere near the 2008 situation. "Any correction should be seen as a chance to invest more. If I have to invest Rs 100, I would invest 10 per cent every month and 20 to 25 per cent on days when the market sees a sharp correction," he says.
The sharp plunge in crude oil price - nearly 45 per cent in the past three to four months - leading to relief in inflation and current account deficit is also a key reason why fund managers are bullish. In the next six months, 57 per cent of them expect the oil price to hover in the range of $80 to $90 a barrel. Currently, crude oil is trading at around $60.
Nearly three-fourths of the fund managers foresee consumer price inflation to be between five and six per cent in the next six months. Retail inflation for November was 4.38 per cent. With inflation easing, 67 per cent of survey respondents expect the Reserve Bank of India (RBI) to cut interest rates by 50 basis points in the next six months. "The market expects this rate cut in February. But the weakness in the rupee has tempered this expectation and now the market expects at least a 25-basis-point cut," says Maneesh Dangi, Co-CIO at Birla Sun Life Mutual Fund. Expecting a rate cut, 83 per cent of the respondents are increasing their holdings in government securities.
Most fund managers do not expect the rupee to depreciate further against the US dollar. Eighty per cent of the respondents expect the currency to hover around Rs 60 to Rs 62 in the next six months. The fund managers also expect the government to deliver. "In the next one year, the investment cycle has to pick up. Otherwise the India story will fade away," says Kulkarni of UTI Mutual Fund. Rate cuts, the budget, earnings upgrade and the Goods and Services Tax (GST) are the main triggers the equity market eagerly awaits.
In the next budget, the fund managers expect the government to move towards next-generation reforms, fiscal consolidation and a roadmap for GST. "The market, including international investors, expects clarity and consistency in policy. This includes delivery of GST and how incremental investment is to happen. One can't only depend on consumption-led growth," says Udasi of Tata MF. In fact, 64 per cent respondents expect the investment theme to play out in the next one year.
Seventy-four per cent of the fund managers expect growth in gross domestic product (GDP) to be between 5.5 per cent and six per cent in the next six months. One of the major risks that the market faces, fund managers say, is the slow pace of reforms by the government leading to muted earnings and GDP growth. While 19 per cent of them felt that a slowdown in foreign portfolio flows could spoil the party for the markets, 12 per cent said any depreciation in the rupee could also be calamitous.
Though a rise in US interest rates may act as a speed-breaker for a short time and any shock to global growth could have cascading effects on India's GDP growth, no fund manager has any worry so long as corporate profitability improves.
"Over the next three to four years, as the economy sees a cyclical uptick, clocking a CAGR of 17 per cent, propelled by higher revenues, operating leverage and interest cost savings driving growth in earnings per share, the Sensex can hit 48,200," says Patil.
Key findings of the BT-Morningstar asset allocation survey