It is a timeless debate – growth versus value. Some vociferously state that value investing has failed. Others disagree. Srinivas Rao Ravuri, Chief Investment Officer – Equities, PGIM Mutual Fund, share his views on the subject.
Growth has outperformed value for a long period. Do you see this reversing anytime soon?
Investing in equities is all about investing for growth. As fund managers, we take a calculated bet on what is the likely earnings growth and the sustainability of that growth of the companies that we evaluate. In India, we have seen an extended period of slowdown in the economy.
Many companies have reported disappointing earnings growth. They have become value stocks based on historical valuations.
On the other hand, consumption-related companies exhibit secular growth in India. Also, these companies rely on intangible assets. Globally, there is a fancy for such stocks. This, along with the trend of passive funds buying these stocks has made them very expensive.
Currently, public sector companies are in the value zone as investors are rightly worried that the majority shareholder seems to be not so concerned about shareholder wealth creation in these companies. The moment we see these concerns abating and growth coming back, most of us would buy value stocks which will narrow the current valuation gap between value and growth stocks.
How do you see the recovery happening among sectors which are worst hit by lockdown?
Income levels have come down due to the lockdown. There is a definite trend towards downtrading and deferment of consumer discretionary, specifically high-value items.
Sectors like aviation and tourism are most adversely impacted. The cure for the virus is still elusive. Most people would travel for leisure only after a cure is found. So these sectors will continue to suffer for some more time.
Industries like retail will recover once new cases start coming down.
As far as automobiles go, there is a safety concern while travelling in public transport. This will push demand for vehicles – whether used cars or new entry-level cars. Preference for pre-owned cars is a clear trend. People are trying to reduce their outgoing. They don’t want to increase liability in terms of higher equated monthly instalment, or EMIs. As regards luxury cars, that market is very small. The market is dominated by entry and mid-level cars. India sells only 40,000 new luxury cars, which is 1% of the total car sales.
Talking about sectors and industries, how do you feel about restricting imports from China, which stood at $65 billion in fiscal 2020?
Chinese firms have a definite price advantage in producing many goods. Chinese wages might have gone up in the last few years, but their productivity levels are significantly higher than Indian labour. So Indian firms can’t match the Chinese prices, and we could see disruption in production and supply chain if there is an immediate ban.
All kinds of industries - pharma, automobile, capital goods, consumer goods - are heavily dependent on China. We are now saying that we would prefer domestic manufacturing, but the trend over many years has been the other way around. We have to develop self-reliance over a period of time. The government is committed in helping industries to produce locally, but it can’t be done overnight. We have to keep the trade going with China while simultaneously work on building our internal capabilities.
Automakers are dependent on different geographies across the globe for sourcing components. One part would come from China while the other could come from Taiwan. Trying to produce everything locally may not be a feasible option.
Do you feel there is a case for global investing?
Yes.
The first reason is to diversify from Indian equities. The large global companies like Google, Amazon, Netflix are becoming much larger. Companies like these companies are capitalising on their reach, scale and ability to fund losses and most importantly, spend more on technology. These companies are not listed in India.
Then comes the currency exposure. The rupee has been depreciating against the global currencies. So investors can diversify away from rupee by investing abroad. This can help in funding a future need like children’s education abroad.
Around 10-15% of one’s investable assets could be in international funds.
There are a plethora of Fund of Funds, or FOF, Indian investors can choose from.
Yes. But despite there being so many options, very few funds worth investing into.
Investing in thematic and sectoral funds can be avoided as there is a higher risk in such funds. One should invest in funds offering global equities and emerging markets.
After shortlisting funds in these two categories, one should apply the standard filters like fund performance, fund house pedigree, team, etc.
If one is choosing only a country-specific fund, then he/she can opt for a passive fund. If one is selecting a fund which is diversified across regions, then active funds are ideal.
