Mr. Karthikraj Lakshmanan
Senior Fund Manager (Equity)
BNP Paribas Mutual Fund
Mr. Karthikraj Lakshmanan is at the helm as the Senior Fund Manager – Equities at BNP Paribas Asset Management (BNPP AM), since July 2008. He brings a wealth of experience of over 13 years coupled with insightful knowledge of the financial domain.
Mr. Lakshmanan has previously held several leadership positions including Senior Research Analyst in the Portfolio Management Services division of ICICI Prudential AMC assisting the Fund Manager in managing Equity Portfolios. He has also garnered valuable experience working with Goldman Sachs in the Global Investment Research Division and with Wholesale Banking Group of ICICI Bank.
A seasoned professional, Mr. Lakshmanan is an astute reader of the market dynamics and brings strong fund management capabilities to the table.
Mr. Lakshmanan is a Chartered Accountant and holds a Post Graduate Diploma in Business Management from SPJIMR, Mumbai. He has a CFA Level 3 (CFAI, USA) degree as well.
Q. The year 2017 has again been a great one for the equity markets, as it has been doing for quite some time. What is your expectation for year 2018?
Answer: The year 2017 has been a rewarding year for equity investors. From the lows of demonetisation and the withdrawal of easy global monetary policies the Indian equity market, year-to-date gained 29%1 and remained one of the best performing emerging markets2. In our view India had done a remarkable job in repairing its macro economy between CY 2014 and H1 2017. We believe that the best of the macroeconomic improvement is behind us and that from CY 2018 to 2020 we may see some deterioration in a few macro variables, though not to the same extent as the taper tantrum period. Lower commodity prices were the prime reason for India’s improved basic balance of payments but the recent run in crude oil prices poses a threat to the improved current account deficit.
The private sector as well as the government had shied away from spending for a better part of the last three years. But the government is now finally trying to stimulate the economy through various spending measures such as farm loan waivers, policy push on affordable housing, the Bharatmala project, recapitalization of public sector banks, etc. All of these measures could lead to a higher velocity of money and ultimately could converge into better near term growth. This may show up in corporate profitability and earnings growth albeit at the cost of deteriorating macro variables.
Key themes for 2018:
Macro variables may not improve from here, as seen in CY 2014 - H12017
Pollution clampdown will gather pace in China and India aiding select domestic sectors
Pickup in discretionary consumption led by urbanisation
Nifty 50 returns as of December 29, 2017
Doubling of farm income to aid rural consumption
Financialisation to gather pace - domestic flows to stay robust
Earnings may have finally bottomed out
Consumer price inflation is likely to average around 5% in financial year (FY) 2019, up from an estimated 3.7% in FY 2018. Our base case remains for a rate hike in the next 6-9 months, possibly in Q1 FY 19. Nevertheless, we are not expecting an aggressive hiking cycle as the RBI has largely held its ground, and refrained from any significant easing as inflation fell. We expect 10 year G-Sec bond yields to slowly inch upwards in the next 6-9 months from 7.75-8.0% on account of rising inflation and interest rates.
Earnings may have finally bottomed out but dispersion in earnings will continue, we see headline earnings growth likely to return, given; (a) sequential improvement in earnings (b) the return of inflation; and (c) improved demand from favourable policy and tax changes i.e. consumption push in domestic economy, better global growth and stressed asset resolution.
From the perspective of capital markets and investors, since higher inflation is negative for interest rates, fixed income as an asset class is expected to continue its underperformance and at the same time equities should continue to do well because the early stages of inflation tend to be good for corporate earnings. We are currently in this stage where inflation has a positive impact on corporate earnings. For this reason we are bullish on equities.
In our view the macro variables - current account deficit, inflation, fiscal deficit and oil price - which behaved well in the last three years are exhibiting mean reversion and micros (read earnings) are likely to do well. In this context we believe the year 2018 could be the year of the ‘U-turns’ for both macro and micros. For 2018 we believe the themes stated above will drive our investment decisions
Q. The Q3 GDP growth stood at 6.3%, much higher than 5.7% in Q2. What is the market expectation going forward and when can we possibly reach the 8% rates again?
Answer: The QE Sep 2017 GDP print of 6.3% yoy showcases gradual recovery in the manufacturing and investment, but we would not be lured by these numbers as these are lag indicators. The macroeconomic indicators we track are showing signs of recovery in most areas of consumption while some industries are being led by low base of demonetisation. Cement and steel production, oil consumption and passenger vehicle sales, as well as credit growth witnessed healthy recovery. Manufacturing purchasing managers’ indices indicated expansion in core industries. As the economy recovers from the impact of demonetization and the transitory disruption caused by implementation of GST we expect the recovery in macroeconomic indicators to continue and help attain GDP growth rate of 7% - 7.5% in CY2018.
Q. What will be the consequences of merger of the same type of mutual funds under SEBI's mandate for investors? Should they be worried about it at all?
Answer: The SEBI categorisation exercise was aimed towards bringing in uniformity in the investment strategies offered and to reduce the number of duplicate funds in each category. As a result investors should be able to clearly identify categories / funds as per their investment needs given that there will be apple to apple comparison between the funds and that coverage by rating agencies on funds will be uniform going forward.
Investors may need to keep an eye out for any changes in investment themes and re-evaluate the fund and its fitment in their investment portfolio.
Q. Investors are today investing nearly Rs.6,000 crores every month in equity markets via SIPs. Do you feel that investors have finally embraced mutual funds or is there still a long way to go?
Answer: We believe that mutual funds have a long way to go, although they have found more favour with investors.
We believe the structural and cyclical factors for now favour the rising household savings; the share of financial savings has been increasing within household savings and equities have been occupying a larger share in financial savings.
Q. From a retail investor's perspective, what should be his investment strategy at this moment? How should he invest and what segments of the market should he be looking into?
Answer: An investor should consider having a well thought out investment philosophy and process should be followed diligently in all phases of the market. Investors are advised to consult a financial planner in order to advise them on wealth creation plans and asset allocation per their risk appetite. We believe that it is one of the key criteria for success. Equity is a long term asset class where an Investor should ideally have an investment horizon of at least 3 to 5 years. While near term valuations are higher than the long term average, we believe earnings growth is likely to accelerate over next 2-3 years period.
From that perspective, we believe, Indian equities outlook is positive from the next 2-3 year horizon. One of the disciplined ways to participate in the Indian equities is through SIPs facility available with Mutual Funds.
Q. What is your investment strategy at present and how are you investing the new funds being received?
Answer: At BNP Paribas Asset Management, we follow the ‘BMV’ investment philosophy which stands for Business, Management and Valuation. We, as a team, have stuck to this philosophy and focused on identifying superior and sustainable earnings growth companies. The framework helps us in bottom-up stock picking and at the same time helps us to weed out weak businesses.
In the normal course of business we tend to deploy new funds in a staggered manner. However if the market provides any new opportunity or in the event of a sharp correction we could expedite the deployment. We don't believe in taking cash calls or timing the markets.
Data Source: Bloomberg