While markets have been under pressure, Anoop Bhaskar, head-equity, UTI Mutual Fund, in talks with Priya Kansara Pandya suggests things can only improve from here on and they are slowly reducing overweight on defensives as valuations are high and buying into banks. He also spoke on the other sectors that look attractive and the outlook for the markets. Edited excerpts:
Would you recommend investors to buy their favourite sectors now or wait for some more time?
Timing the market has become even more difficult in the current times. If we do not see a reversal in the rupee’s direction, it will be difficult for equities to give positive returns consistently and underperform fixed income category. However, this is the best time to enter if an investor can stay invested for at least 18 months.
Do you think the negatives (high inflation, slow growth and global concerns) are factored into the Indian stock markets? How much downside do you expect and why?
Historically, below 10-11 times a one-year forward multiple is the level from where the markets have rallied consistently. Currently, we trade at around 11.5 times. So, the chance of the fall (if at all) is maximum 7-10 per cent.
I would not bother much if markets fall below 10 times, as it will be a temporary dip. The factors for further downside would be the fear of global shocks (euro zone issues) actually materialising.
Don’t you consider continuation of disappointing corporate performance as one factor for further downside?
Right now, the expectations are low for most stocks (except consumer staple companies) after pain witnessed in the last few quarters. Most of them are trading below their 5 or 10-year average. All depends on the valuation which the sector is trading at. Even within sectors, the reaction will be stock-specific.
How do you see 2012 panning out for markets?
I see equities giving positive returns at least in the second half of FY13. This will be the base case scenario. Interest rates in 2012 will surely come off from 2011 levels.
Clearly, the chances of interest rates to sustain at these levels beyond six months appear low. They appear to have peaked out and at some point of time, will start to reduce. Inflation will come off to some extent in the first half of the year due, to the base effect of last year.
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Coupled with this, we have policy measures and governments’ initiatives to control the fiscal deficit for FY13 in the budget. Thus, I expect things to only improve here on and the pessimism for equity markets will reduce. A dip in commodity prices will help.
This will lead to lot of foreign money flowing into India, as we are considered the best play during falling commodity prices.
What strategy are you playing in the current volatile conditions? How have your cash levels moved?
We took a call early in the year that markets had peaked and raised cash across funds. But since the middle of the year, our cash levels have down from 10 per cent to seven per cent. So, we have deployed cash slowly. We have played on the large caps and reduced exposure in midcaps and small caps across funds.
Since the start of the year, we have been more overweight on defensives (consumer staples) but now we are slowly reducing, because we find valuations are very high.
We have cut our positions on banks for most of the year but are now building our positions, as I think the macro environment will improve and interest rates have peaked out.
We were overweight on automobiles. However, we keep churning and shifting between two-wheelers and four-wheelers, so that our overall weight is fairly constant. The sector will benefit if metal prices soften.
Capital goods stocks provide good entry levels, as the disbelief of any recovery is built in fairly strongly. Lastly, larger construction companies also look good. Below a certain levels, not having L&T in your portfolio is like assuming economy is not growing.
They will benefit from the up-move in the cycle.
Do you think the markets have punished the infrastructure sector too much?
We have seen a four year correction in the sector. In the next five years (from valuation perspective), these sectors will get re-rated especially due to improvement in a macroeconomic environment.
The demand-supply for these products and services will again catch up with the uptick in the economic activity.
I don’t think they will touch the peak valuation they had in CY07. But they will not remain at the levels where they are today.
cWhat is your view on the retail sector?
I believe the announcement of FDI in multi-brand retail is like a first step in the 1,000-mile journey. So, let’s not get overjoyed by it because a lot of things have to fall in place to achieve the goal.
Retail, as a business, provides great opportunity and growth prospects, irrespective of economic conditions, but it requires lot of capital.
Most Indian companies will find it difficult to manage and sustain without foreign ownership. I hope this is not just an announcement and the government follows with concrete action.