WF: Which stock/sector calls in your view have enabled you to post a top quartile performance over 1 and 3 year horizons in your Invesco India Growth Opportunities Fund?

Taher: The outperformance of the Invesco India Growth Opportunities Fund over the last 1-3 years has been driven by a combination of:

• Bottom-up stock picking and active fund management at an aggregate level
• Our materially overweight stance in growth sectors such as consumer discretionary and private financials
• Careful stock selection in cyclical sectors such as oil and gas and industrials (with overall sector position being underweight)
• Avoidance of sectors with expensive valuations such as consumer staples and healthcare.

WF: Now that we have the Budget and RBI Policy behind us, what are likely to be drivers and detractors for the market from here on? How do you see markets shaping up over the next 12-18 months? How material is the upcoming election in this context?

Taher: Notwithstanding the general elections and its outcome in the next 3-4 months, the improvement in the magnitude and the quality of corporate earnings are likely to be the key driver of market performance over the next 12-18 months. In our view, with macro-factors assuming stability – softening raw materials costs and interest rates, stable currency and fiscal deficit – and with the correction in valuations of the broad market over the past 12 months, we believe equity markets are turning attractive and the risk-reward balance is turning favourable from 2-3 year perspective.

WF: Some experts worry about the continuing trend of narrow market breadth, which we saw in 2018 and continue to see in 2019. To what extent is this a concern for you? How do you manage diversified equity portfolios when market breadth is narrow?

Taher: In our view, cyclical factors such as market breadth and/or liquidity are typically overstated in their importance over short periods of time. While such factors at times do pose operational challenges in fund management they do not detract us from the core purpose of generating consistent returns over longer stretches of time such as 3-5 years.

WF: Some analysts are calling this the lost decade for corporate India, due to the prolonged slump in earnings growth. What exactly is the cause for this unusually long lean spell on earnings growth and what will you look for to give you confidence that we are leaving it behind finally?

Taher: When one looks at corporate profits as a proportion of GDP, the ratio has fallen from 5.5% to 2.8% during 2008-2018, a bulk of which (88%) is estimated to have been contributed by PSU banks (value having migrated to private banks), oil and gas & metals (depressed and volatile commodity sector post China slowdown) and telecom and utilities (due to significant capex). Private Banks, NBFC, Autos and Technology were the only sectors witnessing an improvement in the profit/GDP ratio over the last decade thereby leading to an overall earnings growth profile of <5% CAGR during this period.

We expect the corporate profit to GDP trend to improve FY19 onward, even as we do not foresee acceleration like 2003-08. Corporate Banks (both PSU Private) – one of the biggest contributors to the downtrend in corporate profit to GDP – are expected to drive the expansion as asset quality bottoms, fresh slippage generation moderates, provisioning cost normalizes and loan growth recovers. Sectors such as capital goods would see a slow recovery as system capacity utilisation increases leading eventually to a new round of pvt sector capex. Incipient signs of capex spending in select sectors (Refining, Steel and Cement) offer some confidence in their contribution to aggregates. Telecom and Utilities, which have seen significant capex investments and balance sheet expansion (rising capital employed) without commensurate returns driven by new competitive intensity, may have troughed and can contribute to this cycle over the next few years. Sectors such as consumers, auto and pvt banks are expected to display resilience in their contribution to overall earnings. When seen over longer periods of 10-15 years, new sectors evolve and contribute to the profitability and growth metrics. Insurance, organised retail, high-end discretionary consumption, asset management etc are now listed and are gaining scale. We expect their contribution to overall earnings growth of the system to increase over the next decade.

WF: Which sectors do you see creating wealth over the next 3 years and why?

Taher: Our approach to wealth creation through investing is buying businesses which are available at a discount to their estimated intrinsic value and hence may not be restricted to some sectors at the cost of others. While consumption and financials may be obvious choices as growth sectors for India over the next 10-15 years, creating investment wealth will also require buying these businesses at attractive valuations. Similarly investment-led sectors such as capital goods and infrastructure too may provide investment returns if they are purchased at the right valuations relative to their intrinsic value. In short therefore, over longer periods of time we believe investment and wealth creation opportunities in India can arise from multiple industries and businesses.

DISCLAIMER

The views are expressed by Mr. Taher Badshah, Chief Investment Officer Equities at Invesco Asset Management (India) Private Limited. The sectors referred herein should not be construed as recommendations from Invesco Asset Management (India) Pvt. Ltd. The scheme may or may not have any present or future positions in these sectors or in any other schemes offered by Invesco Mutual Fund. The views and opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. All figures and data included in this document are as on date and are subject to change without notice. The reference to the scheme(s) if any mentioned herein are only in context with the question asked and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any scheme(s) or to adopt any investment strategy. The views and opinions are rendered as of the date and may change without notice. The recipient should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. Invesco Mutual Fund/ Invesco Asset Management (India) Private Limited does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.

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