Given the government’s stance about anti-profiteering, one-off gains for any particular sector from GST should be ruled out, says Vishal Kapoor CEO, IDFC Asset Management Company in chat with ET Wealth.

With Sensex and Nifty at new highs, what are your short- and long-term views on the equity market?

Our long-term view on the market is constructive. There have been several positive fallouts of the three years the Modi government has been in power, including structural reforms, government spending to accelerate growth and benign inflation.

These, combined with an improving global macroeconomic scenario, are a big positive for equity investors. However, given the elevated levels of valuations across market segments, short term volatility cannot be ruled out.

How are you positioning your portfolios in the current market? Will you deploy fresh money at these levels?
Our portfolios are positioned for growth as we believe we are in the middle phase of a multi-year rally. Cash positions across our portfolios are at a ‘normal’ level. Currently, none of our funds has taken any tactical call to raise cash. Our team is focused on generating stock level investment ideas that can be winners, and we see a flow of good ideas being discussed.

How has IDFC Mutual Fund changed its style of investments with the appointment of new fund managers in the past year?
We have a clearly defined an investment thesis and strategy for each of our funds. Our fund managers are implementing a process led, clearly segmented strategy for each fund, based on the underlying thesis.

We review and refine our processes continually, and are happy to have augmented our team with fresh talent. Our current underlying theme is to invest in growth oriented companies, with a focus on companies that benefit from growth in domestic consumption.

Given the new GST rates, which sectors seems positive to you and which are you looking to invest in?
GST may initially be a complex indirect tax mechanism to navigate. Although the expectation was that several sectors would benefit from lower GST rates, the reality may be a bit more nuanced. With the government being very vocal about the anti-profiteering clause, significant one-off gains for any particular sector should be ruled out.

However, over the long-term, organised players should be able to gain market share from unorganised players and benefit from a level playing field. Organised retail, media, and specific local and regional themes like radio and the aftermarket for auto components are segments where the benefits of GST implementation are likely to be more immediately visible.

What are the negative factors to watch out for in the domestic and global markets?
While the global growth momentum has rebounded since 2016, risks can arise from shifts in the economic and policy landscape in the US. There could also be some pressure from China due to its inherent reliance on credit and investment growth, high leverage of the corporate sector and widespread excess capacity, as it tightens its monetary policy and shifts to a more sustainable consumption-l ..

However, the cyclical and structural upturn in the Indian economy due to strong growth prospects, record low inflation, narrow current account and fiscal deficit should be robust enough to withstand such an impact.

What’s your view of the bond market and how attractive is it to invest in it now?
The RBI is likely to be on a prolonged pause for the foreseeable future, as it remains focused on achieving 4% CPI target on a sustainable basis. While the near-term inflation may undershoot RBI’s inflation target of 4.5% for the first half of 2016-17, its mainly driven by base effects while cyclical factors such as rural wage growth and minimum support prices, have started to rise.

One-off events such as the implementation of GST and increase in the house rent allowance under the Seventh Pay Commission, could add to the long-term inflation.

For investors, it is important to tune out the noise regarding potential rate cuts or hikes by the RBI. Instead, they must focus on the mental underlying point: that the yield curve today is steep enough to provide lucrative ‘carry’ and hence offers adequate protection against any moderate rate hike cycle that one can encounter down the road.

There is more than a 100 bps spread between overnight and three-year AAA rates. This carry buffer provides adequate protection against any modest rate hikes that the RBI may contemplate later on in the cycle.

What is your advice for investors who have missed out on the current rally in the stock market?
While headline index levels are at record levels, investors must recognise that individual stocks may not necessarily reflect an all-time high valuation.

The investment process is dynamic, and while risks should be taken into account, it’s important to be open to opportunities that keep emerging. Both growth expectations and interest rates have a bearing on valuations, so investor shouldn’t just consider absolute levels.

Several investors have been using every correction as an investment opportunity. Many have chosen to average out their entry point by using tools such as the systematic transfer plans or through SIPs in mutual funds. ..