Huzaifa Husain, head (equities) at AIG Investments tells Puneet Wadhwa infrastructure is a sector critical for low inflation and high growth and would see secular growth, going forward. Edited excerpts:
What do you think of the Assembly poll results? Do you expect a soft landing for the markets ahead of the key events lined up for the coming week?
We still feel the reforms would continue. We are on the eve of the 12th Plan, which is expected to pave the way for large spending in infrastructure, as it is important for India to continue growing.
Given the sharp rise in 2012, have the markets run ahead of fundamentals?
We have been positive on equity market valuations and continue to remain so. The markets are at the same level as in July 2011 and, probably, in late 2007. We have seen a huge correction in the markets over the past five years, which washed away the excesses built into the prices in 2007.
The valuations are reasonable at this juncture and do not build in a modest but sustained recovery. The year has begun on a good note but one should bear in mind that in the last quarter of 2011, we saw unusually depressed markets. Hence, this year looks better.
Having said that, we would like to highlight the fact that the US economy is improving and Europe is not seeing incremental negative news. Local inflation and interest rates seem to have peaked. Decision-making at the corporate level is improving. Given these, we feel equity markets, at these valuations, have the potential for an upside in the medium- to long-term.
What is your investment strategy at the current levels? Are you fully invested?
Our approach is consistent across time periods. We stick to valuations and find mispriced opportunities. Adverse market conditions are ripe for investment in undervalued stocks, which fit into our investment philosophy. We remain fully invested.
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How have you churned your portfolio in the last three months? Any stock/sector you are recommending or increasing exposure to?
Yes, we have churned our portfolio. An area critical for a “low inflation and high growth” scenario is investment in infrastructure. Growth in the last 10 years has been directly attributable to this fact and we may see increased activity in this sector.
It is important to know sectors and companies, which have not priced in future growth. We feel infrastructure is a sector that will see secular growth, going forward, where valuations have not been fully priced in, in this scenario.
Given the sharp rise in equities, is it time to take a flight to safety in the form of investment in debt funds?
We think one should not change the overall asset allocation based on short-term movements. There is a high probability that equity markets will give better post-tax returns than debt investments in the next 10 years. Debt allocations should be based on liquidity requirements, where the exact time is the predominant factor in decision-making. Equity investments, on the other hand, should be made from a wealth-creation perspective over time.
You also manage the AIG Infrastructure and Economic Reform Fund. What is its investment objective and what have been the returns over the past year?
The AIG Infrastructure and Economic Reform Fund straddles the two most important aspects of India’s growth story — infrastructure and economic reforms.
We feel, for India to maintain a healthy GDP growth, the rate of investments needs to be accelerated. Indian savings are huge and, hence, most of the fund requirement for infrastructure investment can be met from within the country. The sector needs periodic review of various regulations and smoother decision-making for success. Just as infrastructure is necessary for growth, we feel a reduction in fiscal deficit is also very important. We invest in companies/sectors which benefit from economic reforms. Fertilisers, oil companies and public sector banks are some sectors that fall into this category.
Given the current and the projected growth rate, do you think the Reserve Bank of India (RBI) will slash key rates next week?
RBI has to ensure reasonable growth at low inflation levels. The central bank’s tightening of interest rates in 2011 has resulted in GDP growth decelerating, which is what it set out to do. The future policy action will depend on how inflation moves from here on.
What are your expectations from the upcoming Budget?
Fiscal deficit is the biggest challenge facing the Centre. It is essential to keep it in check. The government can increase revenues either by increasing tax rates or widening the tax base.
However, calibrated rationalisation of subsidies is essential and the way forward. The success of controlled subsidy rationalisation in petroleum and fertilisers should embolden the finance minister to take stronger steps in this Budget.