Jul 09, 2013 02:05 PM IST | Source: CNBC-TV18

Don't see rate cut now, stay with pvt banks: DSP BlackRock

Anup Maheshwari of DSP BlackRock expects private sector lender to perform better than their PSU peers. He remains wary of auto space in the absence of demand.

Anup Maheshwari, Executive Vice President and Head of Equities, DSP BlackRock Investment Managers repeated what most other analysts are saying that despite the severe weakness, India is better placed than other emerging markets.

While in conversation with Udayan Mukherjee and Mitali Mukherjee on CNBC-TV18, he said the interest rate will take time to correct, and the expectations of market on that front may remain unfulfilled for sometime. "Policy action towards rate reduction is unlikely to happen in the near term."

Also Read: A busy week for Asia's central banks

Defining moment for the market will come during elections. Until then the market will remain rangebound. Right now many stocks are trading below book value, Maheshwari said. "Market velocity is much lower than it was in early this year." The rift between private sector and public sector banks continues to stay wide, with the former performing better. He remains wary of auto space in the absence of demand. Lack of demand is ailing gold ETFs as well. In general, the gold space has been unde pressure all this while with significant redemption in gold funds.

Below is the edited transcript of his interview with CNBC-TV18:

Q: Are you feeling any more cheerful than the last time we spoke or does the news just keep getting worse?

A: The last time we spoke, one of the main criteria we were looking for the main variables was the interest rate trend in the markets and we were hoping that interest rates would head lower, which would clearly help equity markets eventually. Unfortunately, that seems to have got pushed back a little given the way the currency has moved. So it does look like it will be a slower correction in rates than we would have liked.

But nonetheless, we are quite comfortable with the improvement that we are beginning to see. Our sense is now over half of the market in any case is in sectors or in stocks where the pro-earnings growth is fairly decent and fairly consistent. Thanks to the outperformance of the stocks in any case. That lends a base earnings growth overall for the index, which is important. That allows the market to keep consolidating in this range and possibly move up at some stage.

Q: Is this cue within that average earnings that is disappointing though, even for the quarter we are getting into, it could be anywhere between minus 10 to plus 17 depending on which stock or sector you are looking at. Doesn’t that remain a poor earnings performance in terms of how narrow the dependence is on a couple of faces and how poorly the rest of the space is doing?

A: That still is a challenge. There is still fair amount of divergences in earnings performance. But I think we still are of the view that a lot of that is priced in. You have a number of stocks trading considerably below book value in the largecaps as well. All of that to us points to a phase where you get more comfortable that the next three-four years will see some fairly significant upsides on some of these names. All it requires is a small delta changes now.

The big question is what sort of changes do you need for this market to perform or how much negative news is getting priced in. Right now with all the negativity around, it does look like a fair amount of that is in the prices of some of these names. So it does present an opportunity. It is still early to call it any significant secular change but you do get the sense that over three-four years, there are some stocks that will clearly deliver a huge amount of return here.

Q: What about the ownership risk because despite all this bad news, the point that you are making about being priced in, FIIs have actually bought probably USD 65 billion of stocks in the last two and a half to three years and they have sold USD 2 billion over the last one month, does that remain overhang on a market which is so shallow?

A: Sitting in where we are, things look pretty bad to us on the ground. We have discussed this before. It looks pretty bad everywhere.


Q: No, it does not look bad in the US?

A: When I say everywhere, I mean relative to other emerging markets. When I am looking at India, I am comparing it more to its similar category of options that investors have to think about if they are putting money towards emerging markets. So in that sense if you just look at the other emerging markets, the news coming out from there seems to be worse.

Therefore, to some extent one should not be surprised entirely on the desire to still own companies in India. India is also still a very bottom-up market. You still get a fair amount of good businesses to buy which probably attracts some degree of FII flow as we have seen in the nature of the banks so far.

I think counting on very significant FII inflows or outflows, it is a difficult number to gauge but the fact that India has received a disproportionate allocation is not entirely surprising considering some of the challenges we are seeing in other emerging markets as well.

Q: Do people make investment choices on what is looking less worse than the other amongst the set of bad choices, it hasn’t worked with the retail crowd even though gold is falling, fixed income is not that great, it is not like they have come back to equities, do people necessarily make that choice of one looking a less worse than the other and hence requiring or meriting some interest?

A: Global funds have to do that. You cannot sit on cash clearly. So there is a difference between the way an institution would allocate versus a retail investor. I think retail investor has the option but as far as global funds are concerned or emerging market dedicated funds are concerned, they have flows and they have to allocate a certain corpus. It is about choosing what looks best at a point in time. Everything may not look good but then you pick out the relative performers. That is true for an equity portfolio in a domestic fund as well. So I think it is all relative as far as institutional allocation is concerned than absolute.

Q: What do you do with banks as a mutual fund manager now, have you been cutting exposure there?

A: We have held a slight underweight relative to the index but it was a very large part of the index as you know close to 30 percent and therefore it is a sector that you have to hold a good base weight in. So within banks, there is a clear divide between private sector and public sector that continues. It is very clear to us that the secular theme is still with the private sector banks and that remains a buy/hold part of the entire portfolio whereas the public sector banks do need to be tactically looked at from point to point. But overall, within banking as well, we are quite happy and comfortable to own fairly decent weight in the portfolio. We had slightly underweighted it relative to the index.


Q: You have trimmed exposure to autos as a space though, is that a call you are taking for all the auto stocks? Are you still positive on some of them that have a global leg in terms of the revenues they generate?

A: It is very bottom up in some of the auto stocks. Each company now has very distinct characteristics within auto. So the homogeneity does not exist. From a very top-down level, we were looking at the space in a scenario where interest rates generally head little lower. It is a part of the whole consumer discretionary space and therefore we felt that at some point demand would pick up. But again with our view on interest rates getting differed out a little bit, we have been a bit cautious on the sector. It is great long-term credentials but in the short run, some of their numbers could continue to disappoint.

Q: What are the trends from retail high-networth individual (HNI) category over the last few weeks? Have you continued to see redemptions or have they stalled for the moment?

A: It is still more on the redemption side, although the velocity is a lot lower than it was maybe earlier in the year. Net-net, it is definitely not a case of inflows, it is more of stable to slight outflows, I would say.

Q: What is the experience with some of your fixed income products though and even the gold funds that you guys run, over there has there been any big change in terms of investment pattern?

A: In fixed income, it has largely been driven by corporate activity. There it is very difficult to give you a precise trend --because we keep seeing inflows and outflows -- depending on which day I would be talking to you, the trend would be slightly different in the recent past. But suffice to say most of the money still sits at the short end in fixed income and is largely corporate determined. 

As far as the gold fund is concerned, that has definitely been a pressure point. Gold equity has generally done quite badly relative to gold as well. Therefore that fund has had a performance issue. We have seen redemptions already come through as far as the gold side is concerned. Generally, the demand for gold ETFs has also come off now.


Q: On this point about interest rates that you were making earlier, what is the view that you are taking right now that we will get fewer rate cuts or do you think the bond market is now beginning to factor in the price of no rate cuts from here and maybe even the possibility 6-9 months out of some kind of hardening of rates, the way things are going?

A: The hardening of rates is something we probably wouldn’t take at this point in time but it does look like the softening of rate scenario or at least policy action towards rate reduction is likely to stop for now. So if you were counting on further rate cuts coming from policy measures that is unlikely to happen for some time.

Rate hike would require further deterioration of the environment around more currency challenges etc. So now we wouldn’t take that view. However, our sense is that eventually interest rates should head lower. That is still some trend that we would look for. But it is going to be probably at a slower pace than we would have ideally liked to see.

Q: So at this point and I know things are volatile, what kind of year are you guys priming yourselves for? Do you think it is going to be range bound trading stepping into next year because we are almost half done with this one? Do you think it is going to be far more volatile than what we have seen so far? What do you think someone should reasonably expect themselves to see from equities?

A: There are going to be one-two big events so clearly the elections whether they come this year or early next year that will be a very big defining moment for markets I would think. Beyond that as I said earlier we were looking for a more secular trend in the market developing from next year onwards with interest rates heading lower and by secular I mean a scenario where the market can potentially deliver a more consistent 15 percent annualized return over a three-year period rather than going up and then coming back off again and again.

For now I would say given the fact that the whole interest rate reduction cycle has got deferred out, we would still go with the range bound view. So that continues for the bulk of this year.

Q: Aside of the base effect, which will probably kick in for earnings because they have been so miserable over the last four quarters in comparison some of the next few quarters may look better, are you seeing any great pick up in either investment demand? Even consumption demand, which is basically going to drive revenue growth for any of these companies or are we talking about small improvements on the margin because of the base or because of some margin improvements because of things like commodity prices?

A: Clearly the improvements that we see are – we have come lower down from sales. So this is a typical of a cycle now where your sales growth will continue to remain fairly weak but when things start bottoming out, you start to see the operating margin improvement. It comes more from interest rate reductions in the system, cost improvements and then transmits itself into sales growth eventually as the economy picks up on a more sustainable manner.

Hence, it is not surprising to see sales growth being fairly low and that is pretty much what we should continue to expect for a while and when we talk to companies that continues to be the case but at some stage we are looking at the whole margin profile and profitability growth at least stabilising and probably picking up a little bit as the lead indicator of a general improvement for even sales eventually to pick up at some stage.

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