Vetri Subramaniam says India's earnings, cash flows and investment cycle remain more important for equity valuations, while investors should focus on diversification and margin of safety
Rising US bond yields may influence global capital flows and put pressure on equity valuations, but a higher-for-longer interest-rate environment in the United States should not, by itself, be viewed as a reason to turn negative on Indian equities, according to Vetri Subramaniam, MD & CEO of UTI Asset Management Company.
In an interview, Subramaniam said the more important factors for Indian equities are the performance of the domestic economy, corporate earnings, cash flows and investment activity. He also highlighted the importance of fiscal discipline and macroeconomic stability as global yields remain elevated.
His comments come at a time when the US 30-year Treasury yield has moved above the 5 per cent mark, increasing investor focus on the relative attractiveness of equities and bonds globally.
Higher US yields can influence global capital flows
US Treasury yields are an important reference point for global investors. When yields rise, bonds can become relatively more attractive, while higher discount rates can also reduce the valuation investors are willing to assign to future corporate earnings.
Subramaniam acknowledged that higher US yields can influence global investor allocations and put pressure on equity valuations.
However, he argued that investors also need to consider why US yields are rising. Fiscal pressures and concerns surrounding the structural outlook of the US economy are among the factors being watched by global bond investors.
He also pointed to the performance of emerging-market bonds over different investment periods, noting that they have outperformed US and developed-market bonds over one-, three- and five-year periods.
Indian earnings remain a key driver
According to Subramaniam, the domestic earnings environment remains constructive.
He pointed to the improvement in inflation and nominal economic growth reflected in India's first-quarter GDP data as factors supporting the earnings outlook.
For equity investors, the argument is that strong domestic earnings and cash-flow generation can partly offset pressure created by higher global interest rates.
This makes corporate fundamentals particularly important in determining how individual stocks and sectors respond to a changing global rate environment.
Large-caps offer relative valuation comfort
Subramaniam highlighted significant differences in valuations across market-cap segments.
According to him, large-cap valuations provide greater comfort when compared with historical trends, while aggregate valuations in the mid- and small-cap segments remain considerably more demanding.
At the same time, he noted that earnings momentum in mid- and small-cap companies remains strong.
This creates a more selective environment for investors, where earnings delivery and valuation discipline can become increasingly important.
From a bottom-up perspective, he sees opportunities across the market after what he described as a challenging period for the Indian market and economy over the past two years.
However, from a risk-management perspective, he said large-caps may appear relatively better positioned.
Stock selection becomes important at elevated valuations
The divergence between valuations and earnings across market segments means that investors may need to pay closer attention to individual company fundamentals.
High valuations can leave less room for disappointment if earnings fail to meet expectations. Conversely, companies that deliver sustainable earnings and cash-flow growth may continue to attract investor interest even in a higher-rate environment.
The emphasis on a margin of safety therefore remains important, particularly for investors entering segments where valuations are already elevated.
SIPs do not eliminate investment risk
Subramaniam also addressed the continued popularity of systematic investment plans, particularly among retail investors.
He stressed that an SIP is a method of investing over time and does not automatically make the underlying investment less risky.
For example, an SIP into a small-cap or thematic fund still exposes the investor to the risks associated with that segment.
He said investors should use SIPs as a long-term wealth-building mechanism while ensuring that their overall portfolios are appropriately diversified and aligned with their investment horizon and risk tolerance.
Diversification remains central to portfolio construction
According to Subramaniam, diversified funds that invest across the market spectrum can form the core of an investor's portfolio.
Another approach is to allocate across different market-cap segments and periodically rebalance the portfolio depending on financial goals and risk tolerance.
Concentrating exclusively on mid-caps, small-caps or thematic funds can increase portfolio risk, particularly if those segments experience sharp valuation corrections.
The appropriate allocation, however, depends on an individual's financial circumstances, investment horizon and tolerance for market volatility.
SIFs face a test of differentiation
The interview also covered the emergence of Specialised Investment Funds (SIFs).
Subramaniam said the long-term test for SIFs would be whether they deliver differentiated risk-reward characteristics and a better investor experience rather than simply creating another product category competing for the same pool of investor money.
The success of such products will therefore depend on whether they address a genuine investor need and provide a clearly differentiated investment proposition.
Investment process matters more than big decisions
Reflecting on his experience in money management, Subramaniam said his belief in the importance of a disciplined investment process has strengthened over time.
Rather than relying on a handful of major investment decisions, he emphasised the role of a consistent framework for making decisions and managing risk.
He also pointed to survivorship bias in investing, noting that successful investors may benefit from favourable circumstances as well as skill.
For investors, this reinforces the importance of having a process that matches their temperament, risk tolerance and decision-making style rather than attempting to replicate another investor's strategy.
AUM growth should not come at any cost
Subramaniam also discussed the challenge facing asset managers as fees come under pressure.
He identified four broad factors that contribute to sustainable growth: investment performance, distribution, products and technology.
Each serves a different function. Investment performance helps establish credibility, distribution expands reach, products address investor requirements and technology can improve scalability and operating efficiency.
However, he cautioned against pursuing asset growth at any cost in a fee-compressed environment.
According to him, asset managers need to create operating leverage as they expand while maintaining the quality of investment outcomes and customer service.
Technology can improve efficiency but not replace performance
Technology is becoming increasingly important for the asset-management industry, particularly in distribution, servicing, data analysis and operational processes.
But Subramaniam stressed that technology alone cannot compensate for weak investment performance.
Similarly, introducing new products cannot replace investment credibility.
The sustainable model, according to his comments, is to first earn investors' trust through performance and service and then build the infrastructure necessary to manage a growing asset base efficiently.
What investors should watch
The comments come against a backdrop of several competing forces affecting Indian equities: elevated global bond yields, domestic earnings growth, differences in valuations across market segments and strong retail participation.
Investors will need to monitor whether corporate earnings continue to support current valuations, particularly in segments where expectations remain high.
Global interest rates will remain an important external variable, but domestic growth, inflation, corporate cash flows, capital expenditure and fiscal conditions will also play a major role in determining the direction of Indian equities.
Market Outlook
The current environment points to a market where valuation, earnings quality and portfolio construction are increasingly important.
Higher US Treasury yields can influence global capital allocation and equity discount rates, but the impact on Indian stocks is unlikely to be uniform. Companies with strong balance sheets, sustainable cash flows and visible earnings growth may respond differently from businesses whose valuations depend heavily on expectations of future growth.
The contrast between large-cap valuation comfort and richer aggregate valuations in some mid- and small-cap segments also highlights the importance of selectivity.
For retail investors, the key message from Subramaniam's comments is that SIPs, by themselves, do not remove market risk. Diversification, appropriate asset allocation, periodic rebalancing and a margin-of-safety approach remain important considerations.
The broader market direction will ultimately depend on the interaction between India's domestic economic and earnings trajectory and global factors such as US interest rates, foreign capital flows and geopolitical risks.