Sachin Trivedi, Senior Vice President -; Fund Manager, UTI AMC

23 Mar 2022 , 02:23 PM

In an interaction with Mamta Maity, indiainfoline.com, Mr. Sachin Trivedi SVP, Head of Research & Fund Manager  — Equity of UTI AMC said “My advice to retail investors is to form asset allocation plans based on their goal, cashflows, net worth and stick to the same.”

The Fed Reserve has been signalling that inflation is high and it may need to end its accommodative stance. This can cause a sooner and larger than expected interest rate hike.  What is the likely impact of US Fed rate hike on equity markets?

Inflation reading in the last couple of months in the USA has been higher than the comfort level of policymakers, which could mean that the central bank needs to shift focus on the threat posed by inflation. Therefore, one can expect rate hikes by the Federal Reserve (FED) in the coming months. However, unlike in the past (2013), when FED started unwinding the balance sheet, and INR (v/s USD) saw sharp depreciation, this time the situation is comfortable for India. Inflation differential (CPI) compared to the USA is in the negative territory v/s high single digit in 2013, and the current account deficit is also comfortable. FED action of the rate hikes and balance sheet reduction will likely impact overseas finance availability and cost for Indian companies. From an equity perspective, this may potentially increase discount rates, impacting valuations also and dampening companies’ earnings.

The geopolitical situation in Ukraine may lead to an armed conflict. How do you think the Ukraine-Russia crisis will impact the markets?

The current conflict and resultant large-scale restrictions and sanctions on Russian banks, will affect global inflation, investment, and trade. We expect the global supply chain to face fresh challenges as countries directly part of this conflict are suppliers of commodities like palladium, Natural gas, crude oil, and aluminum. Supply disruption would be inflationary and can slow down production in many industries. Higher oil and gas prices in India may result in higher inflation print and higher current account deficit. Indian companies which import edible oil and inputs for fertilizer will also face challenges. A prolonged conflict has the potential to push inflation higher and dampen growth globally.

What are the investment themes that one should consider in 2022?

Post the sharp correction in 2020, broader markets have given more than 100% return, and it was a broad-based rally. However, from here on, we will have to be selective. We believe companies run by sensible management, have good long-term growth visibility, and have a high and good cash flow and ROCE profile will be the outperformer. Especially in this environment when inflation is a worry.

We like select like Auto names, where volumes are down by 20 to 30% in last three years due to sharp increase in vehicle cost, profitability is down due to operating deleverage and lower gross margin. We expect things to reverse in the medium term with the normalization of economic activity. We also like select financial services, including banks, which should benefit from increased credit growth and normalization of credit cost. We are positive on IT names, driven by solid growth visibility and a positive outlook on deal wins.

One of the popular themes for this quarter includes EV that has also been discussed by FM in the budget. What do you think about the companies that are likely to benefit from the development in EV sector and how will it impact the performance of UTI transportation & logistics fund?

The higher total cost of ownership of ICE vehicles, led by higher fuel prices, have tilted consumers’ preference for more cost-effective alternatives like Eclectic Vehicle (EV) and CNG. We have seen an increase in EV penetration in the scooter category and CNG in passenger and commercial vehicles. Manufacturers quickly adopting these trends are not only gaining volume but also enjoying pricing power. Companies part of this value chain have attracted capital and technology partners. On the other hand, traditional players that lack offerings in these categories have been losing market share, and investors are also worried about the longer term outlook of these companies.

UTI Transport & Logistics Fund has been tracking these changes and has modified fund exposure accordingly. For example, the fund has exited from exposure to lead-acid battery players considering longer term impact. Similarly, the Fund has exposure to Auto OEM, having a leading market share in CNG and EV space. On the Auto ancillary side, the Fund has exposure to the companies which are either neutral to these changes or players which have started to win good order share in the space.

What is your advice for investors to build a strong diversified portfolio and navigate through market volatility?

My advice to retail investors is to form asset allocation plans based on their goal, cashflows, net worth and stick to the same. They should not get carried by events and make frequent changes to this allocation, which may deter them from their longer-term goals. It is also advisable to have balanced exposure to the various asset class, including equity. Longer term data suggests that equity as an asset has not just earned return higher than inflation but has outperformed other asset classes like gold, fixed deposits and real asset.