Navin Suri, managing director and chief executive officer of ING Investment Management India, speaks to Puneet Wadhwa on the economic scenario, here and abroad, and his expectations on the markets. Edited excerpts:
Do you think the global equity markets will have a dismal second half in calendar 2012? What do you make of the recent PMI data coming from China and the situation in the euro zone/PIIGS countries?
The PMI data coming from China indicate a slowdown and the probability of a hard landing seems low. Numbers coming out of the US (consumer confidence, ISM, retail sales, unemployment, etc.) have been better-than-expected.
Euro zone growth may continue to be poor, given the issues. To spur and sustain growth, global central banks have eased monetary policy significantly, with historically low rates, as well as maintaining and infusing abundant liquidity. The abundance of liquidity should sustain equity markets. The key risks to global equity markets would be a significant spike in oil prices from current levels owing to geo-political issues, as well as any resurgence of a crisis of confidence in peripheral euro zone countries.
How do you see the Indian markets over the next year in this backdrop?
Given the recent correction after the UP election results and the Union Budget, the market valuations are reasonable at around 13 times 2012-13 earnings for the Sensex. The recent spurt in oil prices and a depreciating rupee are key fundamental risks that could delay rate cut decisions by the Reserve Bank of India. Given the clarification issued by the finance minister on P-Notes and the General Anti Avoidance Rules, the FII (foreign institutional investor) flows should continue, given the easy global liquidity.
What is your investment strategy at the current levels and which sectors/themes are you betting on?
While market valuations are reasonable, kick-starting of the reforms process by the government, as well as support from monetary policy, are required for a re-rating. Some dark clouds impact the expectations on these two aspects.
The lack of hard decisions with regard to subsidies in the Union Budget, as well as the roll back of the passenger fare increases announced in the railway budget, indicate that political compulsions are here to stay. Given this backdrop, the rising oil prices and a rising rupee, we are following a sector-neutral strategy and avoiding large beta calls.
Redemptions in equity mutual funds have hit a 16-month high and a little over 500,000 investors closed their equity portfolios in February. How do you interpret this? Are retail investors cautious due to the macro-economic situation, while FIIs choose to ignore it?
It’s a combination of several factors. First, the rally in 2012 did catch investors by surprise. While some may have used it to book quick profits, others may have seen an opportunity to cut losses. In either scenario, the redemptions will increase.
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Second, a rally like this can become a psychological barrier for fence-sitters to enter. Besides, fixed income instruments such as fixed maturity plans and the recent spate of high-yielding infrastructure and tax-free bonds also gave strong competition to equity MFs, especially when you compare risk-adjusted returns. When you combine all of these factors, you will witness a phenomenon like you’ve mentioned.
As for FIIs, data shows they’ve actually invested a significant $9 billion into the Indian markets since January 2012. This implies they see India as attractive, relative to their other options. We need to remember that a GDP growth rate of over seven per cent is compelling.
L&T Finance has bought Fidelity’s AMC business in India; Nippon has invested in Reliance AMC. With mergers and acquisitions (M&As) on the rise, how do you see the MF industry’s future?
With penetration of MFs at less than four per cent, the case for growth, with ‘local products for local investors’ in this business, over the long term is intact. Add the fact that the regulator, too, sees MFs as critical to the growth of Indian capital markets. If you top it with interest from investors globally who are seeking economies with growth rates like ours, the case for asset management makes business sense.
As for the recent M&A activity, I see it as typical of what happens in any industry with many players.
