With markets trending down over the past month on weak global cues, a falling rupee and domestic concerns, investors are grappling with lower asset values and rising volatility. But Prashant Jain, CIO and executive director, HDFC Mutual Fund, is unfazed. Investors could make money from these levels over the next two years, he told Vishal Chhabria and Ram Prasad Sahu. Edited excerpts:
Will there be another round of quantitative easing and if it comes through what will be the impact?
In my opinion, the impact will be limited one way or the other on the Western economies. They have had significant rounds of stimulus in the past, but growth rates have not moved up. You can give money to a person, but you cannot force him to spend it. The fact is, these economies have lived beyond their means for long and reality is now catching up. Growth rates should continue to be anaemic for extended periods of time. Finally, given the severe stress on the finances of the governments, size of stimulus is unlikely to be meaningful.
As far as the impact on India is concerned, impact will be even smaller. There is no meaningful correlation either between medium term economic growth in India and in the West or between long term returns of Indian and Western stock markets. The only meaningful correlation is of short term returns between the stock markets of India and that of the West, more so in times of panic. This is however limited to a few weeks or months. Indian markets are correlated highly only to growth rates in India over medium to long term.
Is the Indian market already factoring in domestic problems or is there more pain left?
Markets in the short run are extremely hard to forecast. However, if you take a two-year view, this is a good time to invest, as valuations are attractive. After a year, price-to-earnings ratios (P/Es) will look like 11-12 times, which is close to the lower end of the P/E multiples that Indian markets have traded at in the past. You get good bargains only in times of uncertainty and risk aversion. One should focus on value and on long-term growth prospects and not so much on news flow. The past experience also has been that returns on investments made in times of uncertainity at low P/Es have fetched good returns over medium to long term.
What is your view on the market's valuation?
Markets are trading at 13 times estimated earnings one-year forward, which is significantly below the average multiples of the markets. Markets have not moved for three-four years and P/Es have come off sharply. P/Es used to be 25 times in 2007-08. Today, they are 12-13 times and half of those levels. These are attractive P/Es for a fast growing economy like India. Over time, returns should thus be made not just from earnings growth but from multiples moving up as well, particularly when interest rates move down.
Do you expect margin pressures to continue or ease going ahead?
These pressures tend to be sector-specific. I don't think there has been a broad-based erosion in margins. Over time, margins are a function of competition and not really of costs. Costs get passed on or absorbed due to competitive forces. However, margins for some businesses that had risen sharply over the last two years could correct to normalised levels. Margins are not structurally under pressure, at least for good businesses. Yes, interest rates will impact margins of businesses that are highly leveraged. But it also helps earnings as several companies have large amounts of cash. Lastly, margins of commodity businesses move in line with the commodity prices and this should not be confused with margin pressures at a broader level.
Do you see any downside risks to markets from current levels?
P/E multiples of Indian markets have not sustained below 10-11 times, even in panic situations, be it during 9/11 or the Lehman collapse for more than a few quarters. These are difficult times, there is uncertainty, sentiment is not good, but I think rewards will be good over time on investments made at this time. Besides, in my opinion interest rates should be lower and not higher after one year which is supportive of higher multiples.
More From This Section
From a top-down view, which sectors or themes are looking good or those that need to be avoided?
At this point in time, there are no pockets where there are material excesses. There is room for P/E multiple expansion except in the consumer and pharma sectors in my opinion. Stocks in other sectors are down 30-70 per cent after 3-4 years.
What is your returns expectation two years ahead from the current levels?
Returns are very hard to forecast even over a two-year time frame. However, in my opinion the risk reward is very favourable. Earnings should grow 25-30 per cent over two years, despite higher interest rates, as India is a structural growth economy and even in the past growth has been healthy during high interest rate periods.
Additionally, fair multiples for Indian markets are between 15-20 times. That indicates meaningful room for expansion in multiples from current levels.
