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Earnings have not been as per expectations, markets would continue to be range-bound: Swati Kulkarni

Swati Kulkarni, executive vice-president and fund manager at UTI AMC Ltd, managing one of India’s oldest funds, Mastershare, and also a Dividend Yield Fund. She shares her views on equities in general and how to look at dividend yield stocks in a portfolio at a time when growth is dwindling though some stocks continue to maintain dividend payout.

Currently there is a silver lining situation of the market; the interest rate is benign. Inflation is fairly under control. Due to global growth slowdown, the central banks are dovish and supportive. Therefore, we can make a case of an extended period of low-interest rates. Vulnerability remains only with oil; that is if, with the growth slowdown, oil also remains benign. If the investments are channelized, capacity utilization will go up and there will be a cyclical turnaround in auto and discretionary consumption Earnings have not been as per expectations; hence markets would continue to be range-bound.

A single stock may not meet all the parameters. Hence, there are three buckets. Certain stocks have high dividend yield. For some stocks where free cash flow is higher, earnings growth is there. In last one year, certain sectors continue to be high dividend yield because their cash flow generation has been pretty robust and growth decent. One such sector is IT, though their margins are under pressure as they are investing in their businesses.. Dividend yields had dropped, but there is definitely scope for profits normalization as credit costs go down.

In consumer stocks, the valuations have remained expensive for almost two years. Investors are still holding on because growth is not strongly visible somewhere else. These valuations would be correct If growth isn’t there, there will be a shift to companies that are growing at a similar rate but with valuation comfort.

From a bottom-up perspective, some of the mid-cap names have started to become attractive. Pharmaceuticals, for example in other segment. There are concerns on profitability and competition, but valuations have come off despite earnings revision. Also, in auto, especially two-wheelers, there is good amount of valuation correction. The third sector is metals; it is a not-so-much-liked sector, if the price to book is considered. At depressed commodity price also, the metrics have started to look attractive. This might turnaround tomorrow, but one has to be looking at these sectors to find opportunities.

For the one investing in equity MFs, SIPs, etc. stay focused on asset allocation, and don’t get carried away by the noise around equities. Worldwide, investors look at past the returns; invest only when they are attractive. It is important that one looks at financial goals. One has to have an understanding of their financial requirements, assets, lifestyle, and then retirement needs in terms of lifestyle and expenses.

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