D-Street Talk: Fund manager who manages about $4bn of AUM shares insight on 30 years of reforms, midcaps & advice for Robinhood investors

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Ajay Tyagi who is an Executive Vice President & Fund Manager – Equity at UTI AMC Ltd manages about $4 bn in AUM is of the view that midcaps as a category are now trading at a slight premium to large caps, whereas their relationship with large caps over the last 15, 20 years is that of a slight discount.

Tyagi has spent more than two decades with UTI, and prior to being designated as a Fund Manager, he has worked as an Assistant Fund Manager in the Offshore Funds division.

 Commenting on reforms, Tyagi highlighted that what Dr. Manmohan Singh did almost 30 years back was really seminal, really courageous, it unleashed the potential of entrepreneurship here in India, he said in a D-Street Talk podcast with Moneycontrol.

Edited Excerpts –Q) What is your call on markets? We are trading near record highs but seem to be facing stiff resistance around 15900-16000 levels.A) One thing should be very clear – markets have a mind of their own. Since we are in this business of forecasting, I would say a couple of things that are very clearly visible right now.One is that the broader markets have continued to march ahead, while you can say that the top 30 or the top 50, or the top 100 names are facing some kind of resistance, as you very rightly mentioned.

Secondly, I think, if you look at the valuations, the markets do appear to be trading at least at about 20%-25% premium to their average valuations seen over the last 10 or 15 years.

The market is looking ahead right now after about 3-4 years of a lull in the economic activity, and we know that this lull has happened for a variety of reasons — demonetization, GST implementation, a bit of contribution from the IL&FS prices, and of course, a whole lot on account of basically the pandemic.

If the economy goes back to a 6% to 7% kind of GDP growth, and therefore earnings also coming in the mid-teens, the market may continue on its journey ahead.

I guess most of us do remember the most fascinating bull market that we’ve ever had, which was between 2003 to 2008. Most bull markets do see what is known as bull market corrections along the way, so I don’t rule that out.

Q) Manmohan Singh’s July 24, 1991, budget speech is considered as the harbinger of economic reforms in India. What is your take on that? Do you think the best of the reform years are already behind us and what this means for investors?

A) Perfect, I think that is a great question. Let me dial back a bit. Let me just introduce some bit of economics into the discussion.

GDP growth is the factor of three things — growth in labor, growth in capital, and growth in productivity.

Now, we all understand growth in labor and growth in capital. Therefore, let’s just talk about growth in productivity. We’ve seen countries in Europe, Japan, and the U.S. continuing to march ahead because of growth and productivity.

Now, this growth in productivity, in turn, is linked to what we call as reforms here in India. We need a huge amount of fillip for this productivity to continue increasing and reforms are nothing but essentially providing that framework of productivity improvement.

To that extent, I would say that Dr. Manmohan Singh did almost 30 years back was really seminal, really courageous, it unleashed the potential of entrepreneurship here in India.

While I don’t remember the fine print, but I do remember the amount of excitement that was there all around.

That excitement was basically a very wet, warm excitement because we’ve seen a huge amount of productivity improvement, a huge amount of entrepreneurial spirit, which has come in into the country, and which has led to great businesses having been created. Some of them are really of international repute.

To my mind, we still have not traveled a long distance, but we are still far, far away from the amount of productivity at the level at which the Western world operates.

Q) What is your call on June quarter earnings?

A) I think the June quarter, of course, as we are all aware, would be tended, in the context of what we saw in the December quarter of last year, and the March quarter of the last financial year.

The June quarter would obviously look anemic compared to these two quarters for the simple reason that, I would say, for pretty much half of the duration of the June quarter, the economy was in a lockdown. It will lead to a softer quarter.

I actually want to look beyond the earnings sprint or just the quantitative number. And look at the qualitative commentary provided by management.

Q) Small & midcap stocks have been resilient but most experts advise caution after a stellar rally in the last 12-18 months. What is your take?  

A) Yeah, it’s been a fantastic journey for these small and mid-caps from the absolute bottom that they saw in April, May of the last year. I would say that a big part of this rally that we are seeing has happened because they were beaten down significantly.

In fact, if you remember, let me just say that the correction in mid and small caps started way back in January of 2018. That was pretty much the high point of their previous cycle.

And from Jan 2018, we saw mid and small caps correcting. Even if the pandemic wouldn’t have happened, I can just tell you that mid and small caps were down 15% 20% from their previous high.

And the pandemic basically just added fuel to fire and the correction basically became even more pronounced for mid and small caps. And from there, of course, coming back to average valuation itself led to a big rally.

But of course, the party has extended beyond that. Mid-caps as a category are now trading at a slight premium to large caps, whereas their relationship with large caps over the last 15, 20 years is that of a slight discount.

To some extent, you can say that the party has slightly got overextended. Nothing to be overly worried about right now, for all I can say is that the easy money in mid and small caps is clearly behind us.

Q) Your majority of the portfolio is allocated towards banks, financials, and IT stocks. Do you see the financial sector taking lead as the economy turns?  

A) The key holdings in our portfolio are from the financial services space, IT, but equally are from the consumer and healthcare space as well. So, these are the four, I would say broad sectors where we are really bullish.

I strongly believe that if India comes back to a more normative 6% to 7% real GDP growth, it would certainly lead to better outcomes for the banking sector in India.

The credit growth in the economy is a multiplier of overall GDP growth. If GDP growth sustained at 6%-7%, we would need mid-teen kind of credit growth in the economy – that’s good news for banks.

Q) There’s an interesting theme that has come up, especially in the COVID-19. One is definitely the influx of retail investor that we have seen towards the equity markets. And the other thing, which really is picked up was the international business or international diversification. So, what are your views on that? Is it here to stay or it is just a passing phase?

A) There’s a new phrase this time, people are calling them as Robinhood investors, taking cues from what is happening in the U.S.

Whenever markets do well, it does attract a lot of retail participation. This is not something new that we’re seeing right now, of course, we’ve seen it at a different magnitude and scale this time

While the markets have been going up, this is something like a self-fulfilling prophecy because you invest, you get returns, you get emboldened, you get a little more confidence, then you invest some more.

And then till now, it’s been a virtuous cycle. But, we all know our experience that this virtuous cycle definitely gets punctured someday. That’s the time when a lot of these retail investors would be left holding businesses, which possibly weren’t as good as they were anticipating.

The fact remains that bull markets do attract every time in every cycle, a lot of retail participation. Usually, when the music stops, retail investors to actually get burned.

Will this trend last till the time as I said, the music is playing on? This trend will continue. In terms of international diversification as well, I see that trend continuing.

I think a lot of mutual funds have really, very successfully introduced schemes, which basically allow the Indian investors to participate in opportunities outside of India.

I would say that this is true diversification like we’ve been taught in our textbooks. Investors do diversification outside of their local market.

This is just the perfect kind of diversification that most investors can have in their portfolios. And there’s another element to it.

There is always an innovation-led investment opportunity, which perhaps India doesn’t offer, at least not to the level of what the U.S. companies or corporate America have to offer.

A lot of innovation, as we all know, in terms of the Amazons or Microsoft or for that matter, Facebook or for that matter, a lot of innovation happening in the pharmaceutical or biotech side has been happening in the U.S.

By investing in such kinds of funds, we are providing ourselves with an opportunity to participate into such kind of names, which can scale up into really big business opportunities or trillion-dollar opportunities over time.

I think this is a trend, which will only continue and only deepen. And I would encourage retail investors who actually bought some amount of their savings into such funds.

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