While on one hand the markets have cheered the key economic developments and policy initiatives, there has been a steady rise in the closure of equity fund folios in 2012. A sustained rally in equities instils confidence in retail investors to come back to markets, says Sanjay Sachdev, President and CEO, Tata Mutual Fund in conversation with Puneet Wadhwa. A reduction in interest rates in the economy will further give a boost to investment in equities, he adds. Edited excerpts:
How do you see the markets panning out given the political uncertainty we are going through? What would be the worst case scenario for the markets if there are early elections?
Political uncertainty exists. However, recent moves by the European Central Bank (ECB) and US Fed have substantially reduced the risk premium for equity investors across the globe. Thus, the liquidity generated by the central banks in developed markets is likely to find shelter in emerging market (EM) equity.
Within EMs, India currently has an advantage over China, as the Chinese economy is slowing down. Also, in India the recent policy announcements have not been rolled back. This, coupled with strong pick up in monsoon in August and September 12, has considerably reduced the downside risk to India’s GDP growth rates. Thus political uncertainty alone would have a limited impact on equity markets, if global liquidity and economic growth scenarios remain at current levels.
Do you think that the focus will now shift to developments at the domestic level as compared to what is happening globally?
It would be wrong to say that domestic developments did not impact Indian equity markets earlier. In fact, India’s relative underperformance in CY11 vis-à-vis other EMs was partly due to its domestic developments such as low investments and high fiscal and current account deficits.
Recent policy initiatives by Indian Government suggest that policy is moving in the right direction. If we continue to take rational economic decisions and improve the share of investment in our GDP, our markets will be less impacted by global events.
What are your earnings estimates for India Inc for FY13 and FY14? Have the overall estimates and any sectors in particular seen an upward/downward revision?
We expect Sensex EPS to be Rs 1,210 for FY13 and Rs 1,385 for FY14, a growth of about 14 per cent in FY14 over FY13. The important thing to note is that the pace of EPS downgrades, which was very high till March 12, has significantly come off now. Thus the downgrade cycle is bottoming out.
For FY14, we feel that secular growth sectors such as financials, consumer, pharma will continue to have decent growth. We can see a strong bounce back in growth in interest rate sensitive sectors such as autos, consumer discretionary etc. Also, if policy environment improves further, we can see upgrades in earnings.
The last time we spoke in May, you were underweight on public sector banks, global cyclicals, such as metals and refining and petchem. How has this strategy paid off and has this view changed now?
We are still underweight on global cyclical such as metals and refining and petchem. We feel that global growth in CY13/FY14 will be more muted. Our key overweights are auto and auto ancillaries, media and pharma. In other sectors we are more neutral and prefer to take a more stock specific approach.
Cement, Pharmaceutical and the FMCG sector stocks seem to be defying gravity. What’s your call on these three spaces?
Cement has seen strong earnings growth with both volume and margins improving. If investment cycle picks up, cement will be a beneficiary. Pharma and FMCG sectors are secular growth sectors with high ROEs and healthy cash generation. Their valuations are unlikely to come down in a hurry. For pharma sector however, the pricing policy in domestic markets can be a near term headwind.
The market has rallied since September and the overall investor sentiment seems to be improving. Do you think that this can arrest the fall seen in equity fund folios and ease out the redemption pressure?
Investors are looking at the current market rally as a profit booking opportunity, which is evident from the industry’s loss of folios figures in last couple of months. However, as observed historically, a sustained rally in equities instils confidence in retail investors to come back to markets. A reduction in interest rates in the economy will further give a boost to investment in equities.
What is your view about the growth prospects for the mutual fund industry considering the recent policy measures that have been announced?
The recent policy measures will prove to be a watershed moment for the mutual fund industry. The size of the industry – in terms of investor folios – is abysmal as compared to its potential. The policy announcements are in the direction of addressing these issues by way of geographical market penetration beyond the top 15 cities and the thrust on investor education.
There is no reason to believe why the mutual fund industry in India cannot growth manifold hereon with a large savings rate and perhaps the best demographic configuration in the world at this point in time.
