 "Returns in second half of FY16 will be better: S N Lahiri")
Benchmark indices are down nearly five per cent so far this financial year due to earnings disappointment and global concerns such as US Federal Reserve rate hike. The remaining half of this financial year will be better in terms of returns, believes S N Lahiri, chief investment officer, L&T Mutual Fund. Speaking to Chandan Kishore Kant, Lahiri said fundamentally things were better and earnings growth too would improve by the fourth quarter. Edited excerpts:
The market has yielded negative returns so far this financial year. Do you expect the second half of the financial year to be better?
In the last six months of the current financial year, two things have stood out. First, earnings growth has remained lacklustre. We have seen more downgrades than upgrades. Second, global markets have been very volatile with expectations of rate hikes in the US. In the last quarter, we saw significant outflows from foreign investors. So both the fundamentals and flows have been a challenge. The good news, however, has been that the domestic flows have remained pretty strong. By the end of the second half, on a fundamental basis, the situation should be better than where we are today. Our expectation is that we will see improvement in earnings growth.
As a fund house, we do not build positions based on expectations of events that are beyond our control and the outcome of which are uncertain. Events such as Bihar election results and US Fed rate hike do not drive our decision making. What drives our decision making is our understanding of what the ground realities are. We buy into high quality businesses, which offer good fundamentals, such as return ratios, operating cash flows, among others. Our decision to position our portfolios is more driven by these facts and our expectations of how things will pan out over the next few years.
Which are the sectors or themes that you prefer at this point?
The infrastructure space is surely showing signs of revival. Other sectors where we have seen improvement is the automobile sector and more so the four-wheeler segment. The consumer discretionary sector will benefit from reducing operational costs as well as lower financing charges. Clearly, there are a lot of areas which are showing promise at this point in time. Building products is another area we believe can have a good upside over the next three to five years.
Do you also follow a ‘buy on dips’ strategy like other mutual fund houses?
Our idea to buy into stocks is more a function of the value it presents at every point in time. If a stock, which we think is a good buy, falls due to no particular reason we use it as an opportunity to build our positions further. We buy on dips only into stocks where our conviction is strong.
What is your view on the reform process and the actions taken by the government?
The government is definitely trying to pump up the economy. However, factors that are beyond its control such as slackening overall demand in the economy and the low levels of capacity utilisations will surely act as blocks in the near term. As far as reforms are concerned, the government is carrying out reforms with the intent to improve the situation over medium-to-long term. Also, don’t forget today we have a more challenging external environment where growth seems to have come off quite significantly and this seems to be an additional challenge for the government. Nonetheless, the government is ensuring that the investment and capital expenditure side of the overall economy picks up.
What should be the rational return expectations from the markets?
Market returns in the last 12–18 months haven’t been that great, as earnings growth has come off strongly. As we move forward and over the next two-three years, we expect better earnings growth coming back into the system, partly driven by improved demand. Over a three-year time frame, you should see earnings growth in the region of 13-14 per cent and this will help markets surely do as well if not better.
The market has yielded negative returns so far this financial year. Do you expect the second half of the financial year to be better?
In the last six months of the current financial year, two things have stood out. First, earnings growth has remained lacklustre. We have seen more downgrades than upgrades. Second, global markets have been very volatile with expectations of rate hikes in the US. In the last quarter, we saw significant outflows from foreign investors. So both the fundamentals and flows have been a challenge. The good news, however, has been that the domestic flows have remained pretty strong. By the end of the second half, on a fundamental basis, the situation should be better than where we are today. Our expectation is that we will see improvement in earnings growth.
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How are you positioning your portfolios given the ongoing Bihar elections and expected rate hikes by the US Fed in December?
As a fund house, we do not build positions based on expectations of events that are beyond our control and the outcome of which are uncertain. Events such as Bihar election results and US Fed rate hike do not drive our decision making. What drives our decision making is our understanding of what the ground realities are. We buy into high quality businesses, which offer good fundamentals, such as return ratios, operating cash flows, among others. Our decision to position our portfolios is more driven by these facts and our expectations of how things will pan out over the next few years.
Which are the sectors or themes that you prefer at this point?
The infrastructure space is surely showing signs of revival. Other sectors where we have seen improvement is the automobile sector and more so the four-wheeler segment. The consumer discretionary sector will benefit from reducing operational costs as well as lower financing charges. Clearly, there are a lot of areas which are showing promise at this point in time. Building products is another area we believe can have a good upside over the next three to five years.
Do you also follow a ‘buy on dips’ strategy like other mutual fund houses?
Our idea to buy into stocks is more a function of the value it presents at every point in time. If a stock, which we think is a good buy, falls due to no particular reason we use it as an opportunity to build our positions further. We buy on dips only into stocks where our conviction is strong.
What is your view on the reform process and the actions taken by the government?
The government is definitely trying to pump up the economy. However, factors that are beyond its control such as slackening overall demand in the economy and the low levels of capacity utilisations will surely act as blocks in the near term. As far as reforms are concerned, the government is carrying out reforms with the intent to improve the situation over medium-to-long term. Also, don’t forget today we have a more challenging external environment where growth seems to have come off quite significantly and this seems to be an additional challenge for the government. Nonetheless, the government is ensuring that the investment and capital expenditure side of the overall economy picks up.
What should be the rational return expectations from the markets?
Market returns in the last 12–18 months haven’t been that great, as earnings growth has come off strongly. As we move forward and over the next two-three years, we expect better earnings growth coming back into the system, partly driven by improved demand. Over a three-year time frame, you should see earnings growth in the region of 13-14 per cent and this will help markets surely do as well if not better.