With equity markets jittery since the beginning of the year and factors like inflation and fiscal and current account deficits fuelling concerns about the economy’s growth, fund managers are cautious. Anand Shah, head, equities, Canara Robeco Asset Management Company, tells Chandan Kishore Kant he is focusing on largecap companies which have the pricing power to tide over interest rate increases. Edited excerpts:
Has the correction in the domestic equity markets over the past fortnight made you jittery?
Our stand for the past six months has consistently been that inflation is something to worry about, as it will impact the consumption-led India growth story. Besides, the twin problems of fiscal and current account deficits are not new and existed earlier too. India saw a correction as it is one of the most expensive emerging markets. More, it is just an eight per cent cut and it does not mean we are in a bear market.
What gives you confidence that we are not yet into a bear market?
It will be difficult for India to be a bear market at a time when the gross domestic product is doubling every five years. Inflation should not be allowed to turn into a structural problem.
We need to take supply-side decisions and invest in agricultural productivity. It will take time and, meanwhile, we would have to sacrifice growth a little bit to keep inflation under control.
With inflation at unacceptable levels, what will it mean for the equity markets?
Till we have the inflation problem, questions will remain about the sustainability of earnings growth and whether India deserves such a high price to earning ratio. Selective sectors will continue to do well. But, on an overall basis, there is scepticism about the India growth story. I believe the markets will fall further in the short term, but they will bounce back and settle in a broad range of 18,000-22,000 by the end of this year.
In calendar year 2011, which sectors do you see value in?
We see a few companies at reasonable valuations as compared to where they were two years ago. But there will be segments dependent on the domestic growth story which will be able to live through this one year of inflation, a dip in margins and then bounce back. We are focused on sectors dependent on the domestic consumption story. FMCG, pharma, utilities, banking, telecom, media, retailing – these are the sectors we are comfortable with. Unfortunately, nothing is cheap today.
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What is your cash holding at present?
We are 89-90 per cent invested. We normally keep five per cent cash, but we have increased it to around 10 per cent over recent months, as we maintain caution at highs. In our portfolio, exposure to midcaps has been reduced; there is little exposure to cyclicals. But we have increased exposure to largecaps and those focused on domestic growth.
What is your take on RBI’s monetary policy?
It is very difficult to believe that the Reserve Bank can actually control the primary article inflation, which includes food and vegetables.
However, we expect RBI to continue tightening. Over the next six months, there could be a tightening of 100-150 basis points.
Its repercussions on growth?
It will not be bad even if India grows at seven-to eight per cent for one year. If it can solve the inflation problem for good, it will be a healthy thing for equity markets in the long run. So, I will not be too perturbed if the growth comes down by 100-150 basis points from the nine per cent target, if that slowing helps curb inflation.
How will it affect corporate funding and expansion plans?
There will always be delays. New projects will require stability in economy, interest rates and oil prices.
