UTI AMC, one of the leading asset management companies of India, manages almost Rs 3.5 lakh crore in equities and bonds. The company’s CIO, Vetri Subramaniam, talks about how to dodge the choppiness in the market. He talks about comfortable pockets in the market and macroeconomic conditions vis-à-vis GDP growth and interest rates, in an interview with Business Today. Edited excerpts:
Indian equities corrected sharply over the past six months. You’ve seen markets for at least 30-33 years. How do you read them now?
There is certainly a risk associated with investing in equities, which comes from short-term volatility. But I would submit to you that the greatest risk that will prevent investors from achieving their long-term financial goals is the absence of investment in equity.
In fact, one of the best examples of that is UTI’s Nifty Index Fund, which we launched 25 years ago. It started in March 2000, in its first one and a half years, it dropped by almost 40% and yet 25 years later, a simple investment strategy has delivered a CAGR of 13% through the SIP rule.
So, that is the best reason why you should remain invested in equities and not worry about short-term volatility.
UTI AMC has been aggressively increasing its stakes in four-wheeler giants, top software companies, the NBFC sector, and telecom, while maintaining a strong presence in banking. What do your metrics say when it comes to finding value?
Let me break it down simply. Are large caps in the fair value zone? Yes. Are large caps cheap? No. Where do mid caps stand? Still very expensive. What about small caps? Still expensive.
From our perspective, the only area of the market where we have valuation comfort is large caps. While some mid- and small-cap stocks have corrected significantly, offering selective bottom-up opportunities, the overall segment remains overvalued.
If you asked me whether to invest in a mid-cap or small-cap funds, my answer would be a clear no. At this juncture, my preference would be to stick with large-cap funds.
The sector where we see the best combination of valuations and growth is banking and financial services.
What are the spaces that you are avoiding, given the moves that we’ve seen in terms of valuations coming down?
One of the areas which I have had concerns about in terms of valuation very early to the game was the entire industrial space.
Now, that has sold off quite a bit in this recent correction. But the valuations, still to our mind, look more expensive than we would be comfortable with. And I also think recent developments, particularly in trade policy emanating out of the US, would cause entrepreneurs across the world to halt all investments in manufacturing tradable goods.
If there was a dark horse, I would say that is really the metal space.
What is your outlook on interest rates over the next 8 to 12 months? Do you expect an interest rate cut?
The scope for the RBI to cut rates remains limited. It’s important to remember that credit growth had already begun slowing in the fourth quarter of 2023 when the RBI, in hindsight, rightly tightened regulations on aggressive lending in the consumer segment. This slowdown has now played out, with credit growth in the economy moderating to around 11-11.5%, just slightly above nominal GDP growth.
As policymakers focus on reviving growth—especially after the last two GDP prints, which were underwhelming—they may become more comfortable with credit expansion. However, this will likely not extend to unsecured consumer loans, where excessive lending has raised concerns.
Rather than worrying about rate cuts, the key factor to watch is system liquidity.
Once the RBI ensures adequate banking sector liquidity, credit growth can accelerate by 300 to 400 basis points above nominal GDP growth, which creates a favorable environment for the financial sector.
Looking at the broader GDP data, have there been any hits or misses that the markets have failed to anticipate? Specifically, in the auto sector, the latest data shows a rare instance of negative year-on-year sales growth in India. Is this a reflection of the underlying economic weakness—where consumers simply don’t have enough disposable income—or is it due to a lack of compelling new models from auto manufacturers?
The economy is multidimensional, so there isn’t a single factor at play. However, one key aspect that cannot be overlooked is the significant slowdown in credit growth over the past two years, which has directly impacted demand.
Another crucial factor—particularly post-Covid—is India’s increasing emphasis on macro stability and fiscal prudence.
One key market reset that investors need to acknowledge is the shift in nominal GDP growth expectations. Over the last two years, nominal GDP growth has stabilised at 10-11%, with inflation targeting firmly in place at 4% (+ or -2%).
As a result, the days of expecting 12-14% nominal GDP growth and 15% corporate profit growth may be behind us.
While we will continue to
See cyclical upswings, long-term growth projections must align with this new reality: something that equity market participants may not have fully priced in yet.
@Shail_bhatnagar
