While the Greek results may have given some hope, the Reserve Bank of India’s decision to hold on to rates did not cheer markets much. Navneet Munot, chief investment officer, SBI Mutual Fund, tells Chandan Kishore Kant it’s time to add some beta to the portfolio. Edited excerpts:
What do you make of RBI’s decision to hold on to rates?
The Reserve Bank of India (RBI) moved against market consensus and opted to keep the policy rates and cash reserve ratio unchanged due to elevated headline inflation, uptrend in retail inflation indices and lack of supply-side responses. RBI has reinforced the stance of policy moves being dependent on the evolving growth–inflation dynamics.
In contrast to the previous policy in April, where the rates were cut in response to growth falling significantly below the post-crisis trend, the decision on future rate moves would be dependent on the assessment of inflation risks.
How do you currently see the stock markets?
Stock markets had turned too bearish. Now, there are signals that the situation in Europe may not be as bad as it was feared. That is giving hopes to the markets and we saw a little recovery, too. But we must acknowledge the domestic economic data has been weak. However, I feel it is going to lead to some action from the government, which was missing and had caused concerns for investors.
Which sectors look good?
We are far more bottom-up in our approach than taking a top-down call on sectors. We like the consumer space, but there are a lot of companies where valuations have become rich and we have trimmed those holdings. But we have been structurally bullish on the consumption theme. So far, we had the preference to have more defensives in our portfolio like health care, consumer goods and non-cyclicals.
Now our incremental bias is to add cyclicals and rate-sensitives. Our view of staying with consumption and exports played out well. Also, the overriding factor was focusing on companies with stronger balance sheets and visible cash flows. That played out very well. We will look at adding beta in the portfolio and are in a process of reducing exposure to defensives.
Do you agree with S&P’s recent comment (Fitch also gave a negative outlook on Monday) on the Indian economy?
Honestly, I do not agree with that. If we look at the debt-to-GDP (gross domestic product) ratio of several other economies, which enjoy higher ratings, India is definitely structurally poised for higher growth than those economies. Putting these factors together, India does not deserve a junk status when several economies in Europe at the brink of default enjoy higher ratings.
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Do such reports impact your investment decisions?
Not really. I don't think we would pay so much attention to it. Historically, we know that rating agencies are behind the curve in almost everywhere. I think markets are much smarter in terms of valuing these events and realities.
Are equity flows adversely affected due to higher returns in other asset classes?
One of the deterrents towards getting inflows into equities is that over the last couple of years investors have not made money in equities. This ha had an impact on sentiments. The alternatives, like fixed income, are offering decent returns. Bulk of the savings have gone into real estate and gold. Historically, we have seen fixed income returns look very attractive relative to equities, that is probably the best time to put money in equities also. And I think we are currently in a similar situation where equities look good. It's a right time to build equity assets and one should start investing in equities. But cancellations of equity investment through systematic investment plans (SIPs) are on the rise.
Investors must keep a discipline of asset allocation and I think equity markets will offer decent returns as risk-reward ratio looks good. Valuations look reasonable compared to historical averages. I strongly advocate that investors should not stop SIP and continue their faith in the potential of equity markets.
