Huzaifa Husain, Head Equities, AIG Investments spoke to Puneet Wadhwa on investment strategy, Budget and RBI policy.
What is your reaction to how the assembly poll results have panned out? Do you expect a soft landing for the markets ahead of the key events lined up for the next week?
We still feel that the reforms will continue. We are on the eve of the 12th Plan, which is expected to pave way for a large spending in infrastructure, as it is important for India to continue to grow.
Given the sharp rise in 2012, have the markets run ahead of the fundamentals?
We have been positive on the valuations of equity markets and continue to remain so. Markets currently are at same levels as July 2011 and probably late 2007. We have seen a huge amount of time correction in the markets over the past five years which washed away the excesses built into the prices in 2007.
The valuations are reasonable at this juncture and do not build in a modest but sustained recovery. 2012 has begun on a good note but one should bear in mind that in last quarter of 2011, we saw unusually depressed markets. Hence, this year looks better.
Having said that, we would like to highlight the fact that the US economy is improving and Europe is not seeing incremental negative news. Local inflation and interest rates seem to have peaked. The decision making at the corporate level is improving. Given this, we feel that the equity markets at these valuations have a potential for an upside in medium-to-long term.
What is your investment strategy at the current levels? Are you fully invested?
Our approach is consistent across time periods. We stick to valuations and find mispriced opportunities. Adverse market conditions are ripe to invest in undervalued stocks which fit into our investment philosophy. We remain fully invested.
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How have you churned your portfolio in the last three months? Are there any stocks / sectors that you are recommending or increasing exposure to?
Yes, we have churned our portfolio. One area which is critical for a “low inflation high growth” scenario is investments in infrastructure. Growth in the last ten years is directly attributable to this fact and we may see an increased activity in this sector as we go forward.
It is important to know sectors and companies which have not priced in the future growth. We feel infrastructure is one sector that will see secular growth going forward, where valuations have not fully priced in this scenario.
Given the sharp rise in the equities, is it time to take a flight to safety in the form of investment in debt funds?
We think one should not change overall asset allocation based on short term movements. There is high probability that equity markets in the next ten years will give better post tax returns than debt investments.
Debt allocations need to be done based on liquidity requirements where the exact time is the predominant factor in decision making. Equity investments, on the other hand, are to be made from a wealth creation perspective over time.
You also manage AIG Infrastructure and Economic Reform Fund. What is its investment objective and what have been the returns since the past one year?
AIG Infrastructure and Economic Reform Fund straddles the two most important aspects of India’s growth story – infrastructure and economic reforms.
We feel as we go forward, for India to maintain a healthy GDP growth rate, the rate of investments needs to be accelerated. Indian savings are huge and hence most of the requirement of funds for investment in infrastructure can be met within India. This sector does need periodic review of various regulations and smoother decision making for its success.
Just as infrastructure is necessary for growth, we feel a reduction in fiscal deficit is also very important for growth of the economy. We invest in companies/sectors which benefit from economic reforms. Some sectors which fall in this category are fertilisers, oil companies and public sector banks among others.
Given the current and the projected growth rate, do you think that the Reserve Bank of India will slash key rates next week?
The RBI has to ensure a reasonable growth of the economy at low inflation levels. The fact that it was tightening interest rates in 2011 has resulted in the GDP growth decelerating, which is what it set out to do. The future policy action will depend on how inflation moves from here on.
What are your expectations from the upcoming Union Budget?
The biggest challenge facing the central government is the fiscal deficit. It is essential to keep this number in check. The government can go in for increased revenues by either increasing tax rates or widening the tax base.
However, calibrated rationalisation of subsidies is essential and the way forward. The success of controlled subsidy rationalisation in petroleum and fertilisers should embolden the Finance Minister to take stronger steps in this Budget.
