With the markets range-bound and volatile in the past few months, it hasn’t been an easy ride for investors. The good news is that, amid the global concerns, India’s economic and corporate numbers are improving. In an interview with Vishal Chhabria, Birla Sun Life Insurance Chief Investment Officer Vikram Kotak, shares his views on these issues. Excerpts:
What are your expectations for the June 2010-11 quarter (Q1FY11)?
Advance tax numbers for Q1FY11 have been fairly encouraging across sectors, especially banking, capital goods and auto. Robust domestic demand and revival in industrial capex will lead to the above sectors delivering good earnings growth. A few industries made high operating margins in the previous year on account of record low commodity prices. Operating performance, despite rise in commodity prices, could be noteworthy.
With commodity prices down, will the trend in earnings upgrade (for FY11 and FY12) be reversed?
Despite the recent fall in commodities, prices are still high year-on-year. If the euro zone crisis spreads, commodity prices would remain low in the medium term, which would benefit India.
What are your earnings expectations?
After two consecutive years of stagnation in Sensex earnings per share at about Rs 800-825, we expect a rebound to around Rs 1,040, thereby posting strong growth of 30 per cent in 2010-11.
Markets have been range-bound for a few months. When do you see a breakout in either direction?
Given that India’s medium-term growth trajectory remains promising amid a still gloomy world outlook, the country has become an important engine of global growth. A roadmap for fiscal consolidation has been rightly laid down. Strong economic fundamentals, revival in economic activity, growth visibility, structurally appreciating currency, massive infrastructure development and attractive demographic dividend convince us that the Indian capital markets are poised to eventually test newer highs in the medium to long term. The Sensex has delivered a compounded annual growth rate (CAGR) of 14.2 per cent in the last decade as against 4.6 per cent CAGR generated by China and 0.3 per cent by the US. Going forward, India’s outperformance is expected to be greater, based on strong fundamentals.
What strategy have you adopted in this range-bound market?
Our investment strategy favours long-term investing. Our focus is on constructing a high-quality, diversified equity portfolio with a mainly large-cap focus by investing across sectors. This, according to us, will give that extra edge to the portfolio, which will lead to superior returns over the long term. In volatile markets, like the current one, we play on relative valuations and invest in those companies from within our investment universe, which offers attractive prospects. Having a long-term orientation, we buy at every market dip to reap maximum benefit for our policyholders.
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Which sectors/themes will outperform the broader markets?
In my view, sectors with strong fundamentals, visibility of earnings, improving profitability and reasonable valuations should outperform the markets. Banking is likely to do well with a pick-up in credit growth, reduced asset quality risk and an environment of neutral interest rates with a tightening bias. We like capital goods and engineering on the back of a strong order backlog and strong growth in economic activity. It will be primarily driven by power and infrastructure sectors. We are likely to see healthy earnings growth for many companies in this segment.
Will investments in mid-caps deliver better returns in the next one year?
Markets are currently trading at nearly long-term average valuations of 16 times one-year forward earnings. The CNX Midcap is trading at a discount of 20 per cent relative to the Nifty trailing price-to-earnings (P/E) ratio. At peak in 2006, it traded at nine per cent premium to Nifty, leaving high potential. High quality mid-caps with strong earnings growth and credential management could outperform the broader markets over the medium term.
Which are the pain areas in equity?
We are neutral to underweight on telecom and information technology sectors.