The Indian market witnessed a spectacular rally in 2012. The Sensex has jumped over 25 percent. Will 2013 be as good as 2012?
On CNBC-TV18's special show 'The Informed Investor', Rajiv Anand, managing director and chief executive officer, Axis Asset Management, investment analyst Dipan Mehta, SP Tulsian of sptulsian.com and independent analyst Ambareesh Baliga give their outlook for 2013.
Mehta says 2012 was a great year. "It marks a line between the bear market and beginning of perhaps a new bull market. In 2013, investors should invest in quality companies only," he asserts.
Meanwhile, Baliga says the market may see new highs in 2013. "You will have individual stocks moving. Right now, I have turned bullish on metals. I think metals will see a decent performance next year," he adds.
The ultimate theme of 2013, Tulsian says, will be the price-to-earnings (PE) expansion.
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Below is the edited transcript of the interview on CNBC-TV18.
Q: How has the year been? Are we happy at the end of the year?
Anand: It has been a pretty good year, isn’t it? If you look at asset classes, equity has done very well, midcaps have done even better. Fixed income funds have delivered double digit returns. I don’t think investors have too much to complain about.
Q: Retail investors couldn’t have asked for more and yet he is not here in the market, why is that?
Tulsian: That is the problem. Inspite of a fine performance by the market, retail investors have not been able to make money. The problem with the retail investors is that they always look to enter at the fag end of the rise. I am referring to the stock specific valuations.
Second problem with retail investors is that they don’t have the patience. Patience is the key word. If they follow that, probably 2013 can give good returns. They have not yet missed the bus.
Q: When you look back at 2012, do you think it has been more about individual stories than the market per se?
Baliga: It has been individual stories and couple of sectors. Airlines, for example, have performed extremely well. The stock performance has been excellent. You had multi-baggers in Jet Airways, Spicejet.
As far as market was concerned, we got into 2012 without any expectations. Expectations were low. The government was not performing. The difference is that we are getting into 2013 with a lot of hopes. Possibly we should see new highs for the index. In that, you will have individual stocks moving as well as couple of sectors. Right now, I have turned bullish on metals, which I was quite bearish on for last year-and-a-half. I think metals will see a decent performance next year.
Q: How has the year been for you? Are you happy with the way things panned out?
Mehta: Yes, absolutely. The real highlight of the year has been that good quality stocks, the ones with good corporate governance and very high return on investments (RoI), return on equity (RoE), excellent past track record, have all come out with fantastic returns. In terms of corporate profitability also they have delivered.
When I look back, the year has been fantastic for investors per se. It was much needed also, considering the hopeless situation which we were there at the beginning of the year and what we have seen from 2008 onwards. It is a great year. It marks a line between the bear market and beginning of perhaps a new bull market.
Q: How do you look at the stocks that didn’t work out very well?
Anand: In any market that is bound to happen. At various points in time, various parts of the market will not deliver for you. At the end of the day, if the portfolio has delivered for you, as mutual fund managers that is really what we focus on.
In 2012, for us, in Axis, we are quite happy. We were able to manage the risk on our portfolios very efficiently. We continue to stay focused on quality. Our funds have delivered better than market returns and better than peers. So, we are quite happy to have delivered in this market.
The performance of the fund need not necessarily be the performance of the investors. Midcap funds are up 30-40 percent, but the problem is that we have also seen Rs 51,000 crore of redemptions from domestic institutions. Has the retail investor benefited from this? The answer is probably no.
Q: How does the retail investor going into 2013 read FIIs’ activity?
Tulsian: Money, which came in at the fag end of the year, has largely gone into midcap. If you see the behaviour of the frontline stocks, post Diwali, since then we have not really seen any sizeable overseas’ investors money coming into the frontline stocks. That indicates that even they are probably not convinced with the valuations.
You need to have some conviction. One should no go with the preconceived mind that airlines will not perform or metal will not perform or maybe the pharmaceutical will not perform. So, the ultimate theme of 2013 will be the price-to-earnings (PE) expansion.
Take the case of NMDC. If you knock of the cash balance, you are getting a natural resource company, which virtually has a monopoly status, at a PE multiple of five or may be five and a half on the historic earnings. The PE expansion will really be the key. The PE expansions, which we have seen in the selected stocks in 2012, have largely come into the consumption stocks only.
I have not really seen the PE expansion happening in any other stocks. The so called defensives, maybe in case of the IT, we have seen the contraction of PE happening. Same would be the case with pharma. For 2013, you need to select the sector first, but on the stock, look for a PE expansion. That will really be the kicker for any investor to go for investments in 2013.
Q: What will be a good resolution for going into 2013? What would you be looking out for as you wind down this year and prepare for the next?
Mehta: From investor point of view, the resolution has to be just to increase exposure to equity. The allocation to equity is the lowest in several years. Other asset classes are being preferred over equity. That is the only resolution the investor needs to make.
Second resolution has to be to invest in quality companies. As this market chugs along, there will temptation to invest in some of the not so good quality companies, B-grade stocks, the companies which are looking to dilute their equity, where balance sheets are still a challenge. That should be clearly avoided atleast by the small investors or the non-professional investors. Professional investors can certainly get in and get out of those companies because they have access to better systems. They can understand those businesses better.
For the retail investor, who is just about investing by looking at the headlines or some overall research, the best strategy has to be to buy into quality stocks and avoid not so good quality stocks.
Q: How will you begin advising people now for 2013?
Tulsian: I will hunt for the stocks which are ruling at a very low P/E multiple. I find the kind of things happening in case of natural resources and non-ferrous metals. Infact, I won’t mind adding one or two sectors which could be media and cement. You have umpteen number of ideas available in these spaces, in midcap specifically. I am not focusing purely on the large space.
I am continuing the point of Dipan Mehta where he said that do not dilute the quality of your portfolio. I fully agree. By focusing on these three-four ideas or maybe three-four sectors or whatever you may call it, I do not think that you are diluting the ideas. You are having the strong cash flow. For example, Hindustan Zinc who have the cash accrual of about more than 5,000 core every year plus, they have the P/E multiple in single digit. Similar is the case in the cement space, because I see the things remaining quite positive for the cement sector.
No new capacity addition is seen in the pipeline, plus the pricing power seems to be returning back because of the normal growth. Cement is always giving a consumption growth of more than 1.2 or 1.5 times of the GDP.
Lastly, do not expect miraculous kind of returns. United Spirits has become a five-bagger, maybe Wockhardt has become a four-bagger in 2013, but remain contended with a return of maybe about 30-40 percent. You should ideally find yourself to be the best investor in 2013 if you have been able to reap that kind of gains in this market.
Anand: What has also happened is that over the last three-four years, real estate has done well, gold has done well and the one asset that has not moved is equities. In the meanwhile, companies have grown profits by 50 percent, bookvalues have grown up by 50 percent. So, this manic obsession about new highs, we should just leave that at the door because the new high that one is going to get today is going to be much cheaper than the last one that we got. The reason is earlier we were at 21 times earnings, now we are probably at 13-14 times today.
Going forward, we think that inflation has peaked, interest rates will come down by 50-100 bps, so there is space for P/E multiple expansion as well. Ofcourse bank fixed deposit rates have begun to come off as well. They do not look that attractive any more. Just 12 months ago, we used to get double digit deposit rates and that is no longer available. So, in that context I think even relative assets are worse off as compared to equities today. Put that all together and as Dipan Mehta said, do not worry about what stock you buy or what sector you buy, just buy a diversified equity fund because you are so under-invested in equities today.
Baliga: Infact, we are saying that there could be a new bull market. This could be the beginning of a new bull market. One word of caution, the political scenario could be the joker in the pack, because I think after the Budget, people will start talking of the new formation, maybe 2013 and 2014 and what sort of formation will we se. Are we again going back to 1996-1997, when we had a new Prime Minister every couple of months or will we have a solid government?
As of now, things are not too clear. In the rally during the Budget, it could be the time to book out to a certain extent unless we have a clarity on what sort of a government formation we could have post 2013-2014. Otherwise, just exit in that rally to a certain extent, take some profits home.
Q: Will you be advising clients in 2013 to perhaps book out towards mid-year and then wait to see how things pan out?
Mehta: I do not think so. I think that if you go by past history, there have been only two years where you had positive return followed by negative return. Otherwise, all bull markets have come in clusters of two to three years. One was 1995 and 1997 where we had positive and then negative returns thereafter. So, we had a positive return after a negative return which was last year. Maybe in the next two to three years you could expect positive returns. You have to approach this market with a little bit more discipline than what we have been doing. The lessons of 2008 should not be forgotten, leverage should be avoided completely and as I keep repeating, stock ideas will keep on coming. I think what has been the highlight of the last six-seven months or so, is that a lot of new stocks have come into focus, small-cap and mid-cap companies. Stories are floating around and that is exciting a lot of investors and that process will continue. However, one should not go with the flow and should have a perfect kind of a system, the right advisory and the right fund in place to ride this particular market.
That is all we all have been seeing. I have a slightly longer-term outlook, because as you go into 2013 and then into 2014, these could be volatile years. Politics would play its own role and you could also have issues coming in from global markets. So, it is going to be volatile here and that is the way the markets have been since 2008. I think investors have to learn that volatility now, is part and parcel of investing. The only way to beat volatility is to have a much longer-term outlook.
Q: Dipan in all the rating agencies, all the television channels the one word that everyone is been talking about is fiscal consolidation. Do you think the government looks likely to achieve their target and do you think the positive momentum on reforms at least that so far has been building up looks likely to continue?
Mehta: We have a government with fresh energy and they are taking several steps. Every now and then, we hear about some functionary, some minister talk about trying to curb the fiscal deficit. They keep on reiterating that 5.3 percent is the target, although no roadmap is there as to how they are going to reach that particular target. However, a lot of action as well as thinking is going into how if not this year the next year they can get this fiscal deficit under control.
If that does happen, maybe through cash transfer program, or through higher fuel prices, or curbing government expenditure, then it could be a real big trigger for this market. However, for a lot of deep pocket foreign investors and even some of the more intelligent domestic investors, the biggest risk at this point of time is the fiscal deficit. We have this fear because of what has happened in other countries in Europe as well as US. So, if India is somehow able to convince that the fiscal deficit will come, say maybe this time closer to 6 percent, next year closer to 5 percent or so, then that would mean a lot of money coming into stock markets. Inflation would then be under control, it will have an effect on trade deficit. Everything is interlinked. From getting into a cycle which is deteriorating or rather vicious cycle, we could get into a virtuous cycle if they can just handle the fiscal deficit part. That is going to be the key factor which we are looking out for in the next year.
Baliga: I wish that the current government which we saw post September, could continue for the next three years. We would have seen an extremely good bull market, but like I said there is a big question mark.
Q: I want to wind up just by asking one question. Next Diwali where do you see the Nifty levels?
Baliga: Really difficult to answer that. If we see that the political scenario is turning out to be better, at least you can see a leader leading us post 2014. Then I will not be surprised if you see new highs. It is very much possible that you could see levels of 7000 plus but then there is a big question mark there because of which FIIs at least hold back for a while to see as to what happens post 2014. They are the major drivers in the market all through and in that case, we could languish around the current levels maybe closer to 6000-6200.
Tulsian: Not beyond 6500.
Mehta: We are targeting 15 percent return on stocks. Index considering 15 percent would take you somewhere close to 7000 or thereabout which investor should grab with both hands.
Q: So there is consensus building at about 7000, Rajiv what about you?
Anand: 60 percent of household savings goes into bank fixed deposits. Bank fixed deposits today give you 8 percent or 9 percent return plus 30 percent tax, you got to be at 6 percent. This market will give you more than 6 percent returns.