Global markets are gearing up for developments in the US regarding the fiscal cliff. In such testing times, the challenge for India is how to improve the current economic and corporate earnings growth trajectory, Vetri Subramaniam, CIO, Religare Asset Management tells Puneet Wadhwa in an interview. We worry about challenges that the economy faces and the likelihood of higher volatility in the future, he adds. Edited excerpts:
How are you approaching the "fiscal cliff" issue and the current situation in the euro-zone? Do you think that the markets have already discounted the possibility of a (temporary) solution?
The fiscal cliff issue is a significant challenge to the economic outlook in the US and the longer the stand-off persists it will adversely affect business sentiment in that country. Europe remains in a recession and the chance of a financial market disruption originating there remains high.
For India, it means that the global growth environment is challenging and will be a drag on us rather than a lever to help us overcome home grown challenges. Global markets remain edgy about the US policy standoff. But the direct impact of the fiscal cliff on our economy is limited.
That the Indian markets will touch new highs soon is now given. Do you agree with this statement? What is your assessment of how the global equity markets will pan out in 2013?
We look at the market through the prism of valuations and in that context the valuations remain in the comfort zone. Not as cheap as late 2011 but not as expensive at late 2010 (when the Index level was similar).
The challenge for India is how to improve the current economic and corporate earnings growth trajectory, while simultaneously improving our health metrics on inflation, fiscal deficit and trade deficit.
If we do all this, the market will take care of itself in the medium-to-long term. The key to bright outlook lies in reviving the investment cycle even as we improve our performance on other macro health indicators.
Do we have all the ingredients of a secular bull market in 2013? Which sectors and stocks would you advise your clients to buy at the current levels?
There is no recipe – secret or otherwise – to a secular bull market. In the long-term, the market is a slave to earnings growth. From history we know that all bull markets start at low valuations and end at high valuations.
In late 2011, we were significantly cheaper than average; though in the past the market has traded even cheaper. Right now, the valuations are only marginally cheaper than average. We remain constructive but worry about challenges that the economy faces and the likelihood of higher volatility in the future.
What has been your portfolio strategy in the last six months?
Given the macro challenges we have emphasised bottom-up stock picking over top-down allocations. The valuation disparity between cyclical and non-cyclical businesses is also at an extreme. Thus the macro signposts are reflected in the valuations. Our focus is on being invested in the companies that will benefit from an improvement in the macro environment – whenever that happens.
How do you read the recent announcements by the Reserve Bank of India (RBI) while reviewing the Monetary Policy?
We expect the RBI to ease rates during 2013 but expect it to be gradual due to inflation and also the deficit. Where valuations have been attractive we have invested in cyclical businesses.
You recently launched a debt fund? Can you share more details?
We are launching Religare Bank Debt Fund as a thematic debt fund designed as a long-term investment strategy for debt investors looking for a focused exposure to the well regulated banking industry, including government owned entities including the well capitalised select private sector entities, across rate cycles. The new fund will invest at least 80% in Bank assets with at least 70% of the assets in securities rated AAA (long term)/A1+ and equivalent.
In terms of style it will be an actively managed portfolio and will take advantage of mispriced spreads along the yield curve. It will manage duration based on attractiveness of term spreads.
Why a debt fund at a time when the markets look ripe for an upswing?
Given the strong guidance of a possible shift in the policy stance from inflation anchoring towards responding to threats to growth by the RBI, the next few quarters might witness easing rate cycle.
While the central bank attempts to perfect the appropriate and the exact nature and quantum of response we feel the next 6–12 months provide an excellent opportunity for capital appreciation for debt fund investors. Moreover, the current yields are also attractive levels to invest since they are higher than the long-term averages.
