The year 2010 will start on a promising note as we have held on to the gains of 2009, even if it means consolidating for the first few months of the year, says Sundaresan Naganath, chief investment officer at DSP Blackrock mutual fund. After having worked with Credit Suisse Asset Management New York and Merrill Lynch Asset Management Hong Kong, Naganath oversees some of the best performing funds such as DSP Blackrock Equity and DSP Blackrock Top 100. In an interview with Vandana and Neha Pandey, he says challenges that markets face are more external than domestic. Excerpts:
How will you sum up the steep rise in markets this year?
The magnitude of the rise has been significant. Over a short period, there has been a sharp rally, not only in the Indian market but across the world. This reflects optimism that things are getting better. These are results of quick steps taken by central banks and policy makers to address the situation arising from the financial crisis in 2008.
More importantly, we have seen that consumer demand has picked up in India and other parts of the world. The government’s stimulus programmes have helped enormously by adding to the investment expenditure in infrastructure. So, in all, financial year 2010 — notwithstanding the fact that we had a below-average monsoon — will end with 7 per cent gross domestic product growth, which is remarkable.
How do you see the markets panning out in 2010? What are the major concerns?
It will be difficult to give any index a target, but my assessment is that the markets will trade in the 15,000-18,000 range in the first half (in terms of the BSE Sensex). In the second half, I think we should move up if the earnings growth continues to be good.
One concern is the international market environment. There is a lot of debate about whether the dollar will go up in 2010. My view is the dollar may strengthen, but for a brief period, and weaken thereafter.
The second issue is that a rise in fiscal deficit all over the world may put the inflation versus deflation debate on the centre stage. Bond yields are rising again, raising concerns over the potential rise of inflation as we go into 2010. Again, if the increase is moderated, it may not hurt the recovery we have seen in economies all across the world. The possibility of a correction is more contingent on what happens externally The domestic economy is in a fine shape. For FY11, the corporate earnings growth is anticipated at 15-20 per cent. That should provide strong support to equity prices.
Which are the sectors that you see growing in 2010?
In 2009, we saw consumption sectors doing well, which in my view should continue. But, we also expect sectors focussed on corporate capex and infrastructure to do well in 2010.
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There is a feeling that markets are looking fairly valued. What’s your call?
One can argue that the market is fairly valued as it is currently trading at close to 20xFY10 and at around 17xFY11. So, on the FY10 earnings basis, it might appear to be fairly valued, but on the FY11 earnings basis, assuming 20 per cent earnings growth, it might appear more attractive. There are times when we have gone well past 20x and forward earnings and the median has been more like 15-16xPE multiple. So, it depends on which year’s earnings one looks at. But, the market is now looking beyond FY10, that is, at FY11.
There is a fair bit of primary market activity. Some follow-on offers (FPOs) are also lined up. Do you see a more vibrant market for initial public offers and FPOs?
We think foreign equity investors’ appetite for Indian equities is quite strong. Therefore, we don’t see a problem in terms of issues getting done. So, while the pipeline is strong, the appetite for Indian equity exposure is equally promising.
Power and real estate sectors have seen quite a frenzy when it comes to tapping the primary market for funds. Has the investor appetite returned for these sectors?
I think some appetite is returning. Urban property prices are recovering. Perhaps, the residential segment has done better than the commercial segment. In the long term, I think there will be considerable demand, but supply of stock will be limited. So, the medium to long-term story looks quite good for the real estate sector.
We should also remember that whether it is power or real estate, there is a gestation period.
Your World Mining Fund, a commodity play, has just closed. What is your outlook on commodities?
We have a bullish medium to long-term outlook on commodities. We think even if the dollar rallies in short term, it will weaken in the medium to long term, which is bullish for commodities. We think demand will pick up because economies are recovering. The government’s stimulus programmes, which focus on infrastructure, are also commodity intensive.
More importantly, we find that supply of commodities has started declining and large-scale discoveries are not happening. This is particularly true for crude oil and gold. There is a possibility that a huge demand-supply gap may arise in the next three-four years. That will result in prices shooting up. So, any company that is sitting on good-quality reserves, is efficient and has a reasonably good balance sheet should do very well.
The mutual fund industry has been going through turmoil post the ban on entry loads. Do you see this hampering short- and long-term growth?
As far as the ban on entry load is concerned, it has not caused any significant decline in flows. Yes, there has been some redemptions in equity schemes in the last two-three months. But that is an industry phenomenon.
Since the markets have done well, investors are possibly booking profits. Till August or September, the inflows looked pretty good. But as markets move ahead, there will be some desire on the part of investors to lock-in those gains.
Blackrock has completed the acquisition of Barclays Global Investors (BGI), whose i-shares were very popular product suite. Will you bring some of BGI’s products to India?
In the coming year, we do hope to bring some of their products to India. They have a strong suite of products. We will bring whatever we find interesting for investors. We might like to bring some of their exchange-traded funds to India in the later half of 2010.