The markets have been losing ground over the past week due to issues in the euro zone, but Harshad Patwardhan, investment manager for equity at JP Morgan Asset Management and fund manager of JPMorgan India Equity Fund, remains unfazed.
“As long as the India story unfolds, backed by consistent earnings growth, we should be fine,” the fund manager says. But, while corporate earnings have looked up in third and fourth quarters, can issues like a rise in commodity prices and inflation impact profitability?
Commodity concerns
Patwardhan believes a large part of inflation is food price-related and, if the monsoon is normal, should get addressed. But, rise in prices of such global commodities as crude oil is a bigger headache that may force companies to increase prices on the back of rising input costs.
“Whether a company passes on cost increases will be a function of competitive intensity and will depend on whether it wants to protect market share or maintain profitability,” he says. However, sustained demand will continue to be a key earnings growth driver.
Considering that corporate India has been expanding capacities over the last two quarters, demand is likely to remain buoyant. It is hardly surprising that the equity fund has invested a fourth of its corpus in financials and 16 per cent in industrials/infrastructure. The key themes in the equity fund, according to Patwardhan, are infrastructure, consumption and industrial capex.
Justifying their inclusion, he says the infrastructure theme is implemented through infrastructure asset owners, construction companies (that help build infrastructure), infrastructure financers (banks) and companies that supply materials for infrastructure development.
| FUND* PERFORMANCE | ||
| Returns | Fund | BSE 200 |
| 3 months | 9.20 | 6.60 |
| 6 months | 7.30 | 5.00 |
| 1 year | 83.20 | 92.90 |
| Since incep.** | 6.10 | 9.00 |
| Figures in % **May 2007 Source: Com., valueresearchonline.com | ||
| TOP HOLDINGS | |
| Company | % of holding |
| Infosys | 7.67 |
| Reliance Industries | 6.41 |
| HDFC Bank | 5.86 |
| ICICI Bank | 4.42 |
| ITC | 4.21 |
| TCS | 3.53 |
| HDFC | 2.85 |
| JSPL | 2.80 |
| IndusInd Bank | 2.75 |
| L&T | 2.70 |
| Source: JP Morgan India; *JPMorgan India Equity Fund | |
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Investment style
While the fund’s investment style is bottom-up stock picking, the fund manager had a tough time in the last two years as a large part of 2008, and in some part of 2009, investing based on fundamentals was not working. Says Patwardhan: “Momentum and external events were more important during that period and these decided market direction, rather than corporate performance.”
These were the times, he believes, when some of his calls did not work. However, the good news, according to him, is that fundamentals are having a say in how the stocks are moving in 2010.
Moreover, he believes an investor should not change his or her investing style due to market events, or the result will be a ‘neither here, nor there’ kind of a situation. An investor must have the discipline to keep faith and there will be a time when the patience will be rewarded, he says.
Time to exit
The main reason for exiting a stock, he says, is deterioration of fundamentals — it could be competitive pressures, regulatory changes in that sector or because of a change in management.
Do biases come in the way of selling stocks? Says Patwardhan: “We try not to let biases come into the picture by staying objective.” If the management says something and quarter after quarter and the numbers tell a different story, I would believe the numbers rather than the management. You are better off sticking to facts rather than to opinion,” he says.
Investing now
Is this the right time to invest, considering that markets are trading at a price-to-earnings ratio of 17, which is higher than the long-term average of 15?
The fund manager is of the view that investments could be justified as what lies ahead is a period of sustained corporate earnings growth that could include earnings surprises.
“In 2003-08, corporate India delivered in every quarter more than what analysts had forecasted. The next two-three years will be a period of strong growth, probably in the region of 25 per cent. That’s a conducive period for equity markets to do well,” he says.