 "Investors are interested in increasing India exposure: Naganath Sundaresan")
What is your interpretation of the economic data coming from major world economies like the US, Europe and China? What is the biggest risk to the global equity markets?
The delay in the interest rate hike by the US Federal Reserve (US Fed) is a sign that they would give the economy some more time to heal. Data from China and Europe has also not been encouraging. So, in essence, the data has not been diverse.
If one looks at the market action in the past couple of weeks, one of the issues has been whether economic growth is indeed picking up or not, globally. There are fears of deflation setting in, as reflected by the recent decline in commodity prices, especially oil prices. These are key issues that one needs to keep an eye on. I think the decline in oil prices is largely over and prices should stabilise around the current levels for the next few months.
How do the prospects for India look within the emerging markets?
The growth prospects are good from the GDP (gross domestic product) viewpoint. There are a lot of sectors and stocks that one can choose from across the market-capitalisation spectrum. I think investors are very interested in looking at increasing exposure to Indian equities.
The past few days have seen the government address some long-pending policy issues. What are your expectations and what are the specific things you would like the government to address over the next 6–12 months?
Investors, in general, are expecting a lot more policy initiatives to be announced, not only in the Budget in February 2014 but also over the coming months. I don’t think they will be disappointed. In my opinion, one can expect a lot of policy initiatives over the next six–nine months. While the Budget will be watched for policy road map, policy action will not be limited to the Budget.
Do you think India would be de-coupled and not react to how economic growth happens in Europe, China and the US and eventually its impact on the stock market?
One cannot apply de-coupling across the board. Economic performance might be de-coupled, i.e. some economies showing faster growth while others not grow as fast. However, stock market performance might be more connected globally depending on portfolio flows. So, the de-coupling of financial markets might not be as significant as de-coupling of economic performance.
Do valuations for the Indian markets look expensive?
Equity valuations are reasonable, earnings momentum looks set to improve and domestic investors are buying. We, therefore, think the S&P BSE Sensex Index has material upside in the next three years. Any corrections (a 5 per cent-10 per cent decline is a possibility) are likely to be short-lived, we believe. The current rally from the start of 2014 has been based upon the premise that the GDP (gross domestic product) growth rate will pick up and so will the corporate earnings growth. Though key multiples look higher than average, we are of the opinion that fiscal year 2016, we can easily see growth getting back to 6.5 per cent – seven per cent levels and move up above seven per cent the following year.
What is the road ahead for corporate earnings?
We believe the revival in the investment cycle will aid corporate earnings growth to get back to the 18 per cent – 20 per cent level from the sub-15 per cent we are seeing right now. And so, though much of the market price trend has been led by expansion of the priceearnings (PE) multiple, the next phase of the uptrend will be led by acceleration in earnings growth. This will also ensure the PE multiples remain at reasonable valuations from an investors’ viewpoint.
However, in general, over a two to three-year period, the market PE multiple that has been hovering around 13 –15x one-year forward earnings could easily get to 18–20x multiple based upon consistency of the uptrend in GDP growth rate and significant improvement in corporate earnings growth.
In terms of sectors, e-commerce and logistics are being billed as the next big story for India. Have the prospects enticed you to take a look at any stocks from these sectors in the schemes/ portfolios you manage?
These are interesting themes but there aren’t too many listed players in this sector. Much of this is happening either in the start-up phase or in the unlisted space. We are watching these themes evolve but there aren’t too many listed companies in this space yet.
Pharmaceuticals, fast moving consumer goods (FMCG) and information technology (IT) sectors have been the top performers since the past four months. What has your strategy been as regards these sectors?
Of these, I would rank IT, pharma and then FMCG in that order of preference from a sector weight viewpoint. These sectors have good growth dynamics going for them. One has to evaluate the prospects of each industry. We expect to see good growth for these sectors going ahead and they will find representation in any diversified equity portfolio.
What has been your portfolio strategy thus far in 2014 in terms of preference for sectors and stocks? Which ones have you been underweight and overweight on?
We began the year expecting that growth will begin to pick up and will lead to acceleration in corporate earnings growth over the next 12 – 24 months. While we were overweight in defensives in 2013, we decided to have a greater exposure to banking and financial services (BFSI), infrastructure and capital goods sectors, which has worked out quite well for us. That doesn’t mean that our exposure to pharmaceuticals and IT sectors was low. We continue to largely maintain the same approach that we had since the start of calendar year 2014.
When do you see the Reserve Bank of India (RBI) alter its policy stance? By when do you expect the first round of rate cuts?
We don’t see a potential for interest rate cuts just yet. They may come only around mid-2015 or in the second half of 2015. Once inflation declines further and holds steady is when one can expect a cut in interest rates.
In the first half of this financial year, investment into equity mutual funds touched a seven-year high of Rs 33,000 crore. Do you think the tide has turned decisively for the mutual fund industry or the current round of weakness in the markets can dent investor sentiment?
Corrections do happen at periodic intervals. I think that the correction, as we are seeing right now, ought to be taken as a good buying opportunity. I am of the view that economic growth will pick up and so will earnings momentum. So, if one has a two – three year view, any market correction is a good time to buy equities. Optimism among investors is high and this is why net inflows into equity mutual funds has been quite robust this year as compared to the previous years. We expect this trend to continue.