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Slowdown in mutual fund inflows is a concern, says Rajat Jain, CIO, Principal AMC

On the macroeconomic front, the economic slowdown and liquidity stress in NBFCs have impacted the consumption demand in the economy.

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Last Updated: Aug 02, 2019, 10.31 AM IST
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Rajat Jain, Chief Investment Officer, Principal Mutual Fund
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Suddenly, everyone is speaking about a host of negatives factors looming over the markets: economic slowdown, NBFC crisis, debt downgrades, FPI outflows, among others. Shivani Bazaz of ETMutualFunds.com spoke to Rajat Jain, CIO, Principal AMC, to find out what is in store for mutual fund investors in the coming days.

All equity mutual fund categories are giving negative returns in the last one year. Many investors believe the trend is likely to continue for some more time. What is your outlook for the equity schemes?
On the macroeconomic front, the economic slowdown and liquidity stress in NBFCs have impacted the consumption demand in the economy. The capital expenditure cycle outside of infrastructure is also pretty muted currently. The government has limited scope to pump prime the economy, given the fiscal constraints. While the earnings for FY20 should see an improvement driven by growth in banks’ profitability, the overall growth for the Nifty index may be lower than estimated. The market valuations are in line with long-term trends and not cheap per se. As such, the markets are likely to be sideways in the near term. However, the correction has made pockets of the market in mid and small caps more attractive from a mid-term (2-3 year) perspective.

Suddenly, the sentiment is hit. Everyone is doubting the country's ability to grow at a respectable rate. Many investors also believe that a revival would be impossible without concrete steps from the government. Are we going to see a further slowdown in growth?
As said above, consumption demand, which is nearly two thirds of the economy, has slowed down, for various reasons. In some cases, consumers had financed consumption by leveraging. That has taken a knock, given the stress in NBFCs. In case of autos, rising costs and a slower economy has dampened demand for commercial vehicles. Also, some consumer demand had been driven by the roll out of seventh pay commission payouts which effect has gone down. Further, our exports have slowed down due to slower world GDP growth and a fairly robust rupee. So, its multiple factors which have led to a slowdown. Certainly, the economy can recover, but for us to grow sustainably at 8-8.5 per cent, as the government has said, we would need to have more structural reforms.

What are the major concerns for the economy right now and the challenges faced by the markets now?
I have already covered in the precious answers to your questions. An additional factor for the markets is weak FPI flows and slowdown in mutual fund inflows. However, on the positive side, oil prices have been stable and bond yields have come off. Lower bond yields bring down the cost of capital and make equity relatively more attractive.

The outflow of foreign portfolio investors has increased recently after two years of high inflows. How is this going to play out?
Actually, lower bond yields globally make the case for emerging markets more compelling and should be positive for inflows. However, the global uncertainty around trade issues and the ramifications of a slowing China have led to a sentiment of flight to safety among investors. This has hit flows into emerging markets . But if rates remain low, it should lead to search for yield and be positive for EM flows.

A series of debt downgrades shook the market recently. Reports suggest that debt downgrades have outstripped upgrades for the first time in at least three years. This clearly shows that companies are not in pink of health. How big a concern is that for the market?
The downgrades have mostly impacted companies in the financial services space or those companies which were heavily leveraged. Tightness in money markets with its impact both on the cost and availability of funds has hurt their ratings. This has hit sentiment in equity markets not only for those companies, but also other companies in that sector or which are of similar nature.

The NBFC crisis continues in the background. Though many market participants say it will not have a large impact on the market, the health of NBFC is crucial for the health of the economy. How do you view the scenario unfolding?
The NBFC situation is not a systemic issue, rather it concerns specific entities, primarily HFCs, who either had asset liability mismatches/ were funded very substantially in the short-term money market or had lumpy asset exposure to real estate/ projects etc. The NBFCs who are backed by corporate groups and have a granular retail franchise haven’t really had any issues or have had much lesser issues. We think the RBI’s taking over supervision of HFCs is a positive step. An asset quality review could be one way of making things transparent and may give comfort to the markets.

How should equity mutual fund investors prepare themselves to deal with all these negatives factors in the market and the negative returns?
The equity investors have to focus on the medium to long term when investing in equity markets. They should look at investing in a good diversified equity fund as a core product in their portfolio. Timing the markets and moving in and out of funds is not a great idea. Equity investors should keep their investment goals in focus and accordingly allocate funds. Equities may be volatile in short term but in long term it’s rewarding. Also, SIPs allows investors to deal with volatility as it averages out their cost of purchase and investment is spread across different time periods.

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