Markets globally are gearing up for developments in the US regarding the latter’s “fiscal cliff”. In such times, the challenge for India is to improve the economic and corporate earnings growth trajectory, Vetri Subramaniam, chief investment officer, equity, Religare Asset Management, tells Puneet Wadhwa. He talks on these and other expectations on what lies ahead. Edited excerpts:
How are you approaching the US “fiscal cliff” issue and the current situation in the Euro zone? Do you think 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 chances of a financial market disruption originating there remains high.
For India, it means the global growth environment is challenging and will be a drag on us, rather than a lever to help us overcome our 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.
In the Indian context, what is your view on the banking amendment Bill which got the Lok Sabha’s approval on Tuesday?
One must understand why it was required. Two-thirds of the banking sector is dominated by public sector banks (PSBs). The main requirement in the banking business is that in order to grow credit, you must have commensurate equity capital.
With the government insisting that it wants to hold a 51 per cent stake in PSBs, the government will have to continuously support their capital requirements as the demand for credit grows.
The PSBs’ need for regular capital infusion puts pressure on the government’s limited resources. It is imperative we have new banks with alternate sources of capital – be it through private individuals, foreign entities, etc. This is the macro reason for the Bill. It will have a positive effect on the economy in the long term, as we are allowing more banking institutions to come up over time. In effect, the credit growth in the economy can be supported without the government’s support.
Do you think the smaller banks from this universe could be possible takeover targets?
Certain non-banking finance companies (NBFCs) might look at getting converted into banks and some will benefit from this transition, presuming this will help them create a wider reach in terms of both assets and liabilities. This will also likely help reduce their cost of funds. Since the rules on voting rights have also been liberalised, it will push the case for consolidation within some of the older private sector banks. Thus, merger and acquisition (M&A) activity within the private space becomes more likely, as compared to an environment where this Bill did not exist.
Would you look at including NBFC/banking companies in your portfolio as things stand?
One has to be careful about over-interpreting the developments. Some NBFCs will benefit by converting into banks, given their business model, and some bank valuations might benefit from potential M&A activity. We already own some stocks from this space where there is this potential option value; we like their business model. We hold old private sector banks such as Karur Vysya Bank, City Union Bank and Federal Bank, and NBFCs such as Shriram Transport, LIC Housing Finance and Bajaj Finance in our funds.
That the Indian markets will touch new highs soon is taken as a 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 as late 2010 (when the index level was similar).
The challenge for India is 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 these, the market will take care of itself in the medium to long term. The key to a 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 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 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 the challenges the economy faces and the likelihood of higher volatility.
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.
You recently launched a debt fund. Could you share 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 sector, including government-owned entities and well-capitalised and select private sector entities, across rate cycles. The new fund will invest at least 80 per cent in bank assets, with at least 70 per cent of the assets in securities rated AAA (long term)/A1+ and equivalent.
In terms of style, it will be an actively managed portfolio and 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 expectation of a possible shift in the policy stance by the Reserve Bank from inflation anchoring towards responding to threats to growth, the next few quarters might witness an easing rate cycle.
While the central bank attempts to perfect the appropriate nature and quantum of response, we feel the next six to 12 months provide an excellent opportunity for capital appreciation for debt fund investors. More, the current yields are also attractive levels to invest, since they are higher than the long-term averages.
