Moneycontrol
Oct 18, 2017 03:07 PM IST | Source: CNBC-TV18

Samvat 2074: The macro picture

In an interview to CNBC-TV18's Latha Venkatesh and Nimesh Shah, S Naren, ED & CIO at ICICI Prudential AMC, Navneet Munot, CIO at SBI MF and Nilesh Shah, MD at Kotak Mahindra AMC speak about how Mutual Funds will pan out in the New Year.


In an interview to CNBC-TV18's Latha Venkatesh and Nimesh Shah, S Naren, ED & CIO at ICICI Prudential AMC, Navneet Munot, CIO at SBI MF and Nilesh Shah, MD at Kotak Mahindra AMC spoke about how mutual funds will pan out in the New Year.

Below is the verbatim transcript of the discussion.

Latha: How will you invest Rs 1 crore, which will be the stocks or sectors that you will invest this money in?

Naren: Clearly our bet has been on infrastructure and we think that infrastructure is clearly a good sector to bet on at this point of time. Corporate banks we think is another great opportunity to invest at this point of time. I think the quantum of money is small, we hope to get much higher amounts than this.

Nimesh: If you have Rs 1 crore, which funds or which asset class you are going to put money in?

Munot: First of all you should have given it in digital form. My parent SBI is driving digitalization in a big way. However, which fund? SBI multi-cap fund, there are opportunities across market cap, across sectors, across styles, and I am sure that fund will do well for investors.

Latha: Would it be only in equity mutual fund multi-cap?

Munot: I assume it is for long term and I am sure equities in India would deliver better returns than most of the other asset classes.

Latha: If you get Rs 1 crore, what will be the asset allocation, how much for equities, debt, and how much for financial assets, how much for physical assets?

Shah: I will put 70 percent in financial assets, 30 percent in physical assets. For the financial assets, I have taken a pledge that whenever I want to invest in mutual fund, I will go and invest in Kotak Mutual Fund Scheme. So 70 percent of this money I will put into Kotak Select Focus. 30 percent money I will use to buy a commercial real estate somewhere in tier-II city where the city is expanding; it could be Bopal in Ahmedabad where city will expand and I will put that property on rent. The rental income will be almost equivalent to the post tax return on debt instruments. When the city expands to that area, the capital appreciation will be the benefit.

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Latha: Let us come to the macros of Samvat 2074 itself. What is your sense about the India picture, is there any worry about earnings not matching up to valuations? Will 2074 have more challenges or more tailwinds?

Naren: Earnings have not come, not just for one year for the past three years, that is a definite thing but I am believer that earnings is a cycle. So if you looked at the metal sector two years back same time, people believed that how will earnings ever come in metals sector. However, in the last two years, earnings have just shot up through the roof. So, like that we believe that earnings is a cycle. In fact the bigger worry at this point of time for me is that a lot of people think that equity is a very safe asset class and it does not give any volatility, but the experience in the world over the last five decades is been there are periods of volatility, periods of negative returns, but number of investors in mutual funds are today investing assuming that equities are a very safe asset class. That is my biggest worry at this point of time because it is a tough job to communicate to investors who have never seen negative returns in equity that you can have negative returns in equity.

Nimesh: From a global perspective, all the global markets are having a bull run. S&P is at a new high, everybody is talking about this bull market to continue. What S Naren pointed out about a bit of a correction, or a risk, from a global point of view, what sort of risk you foresee which can hurt emerging markets as well as India?

Munot: It has been Diwali time for most of the global investors. As you rightly said, all the global markets are at a record high, volatility is at a record low, inflation is yet to rear its head while the global growth seems to be improving in a synchronized fashion right from US to Eurozone, to China despite all the fears about debt overhang in China, the lack of reforms in US, the global growth is improving, corporate profitability globally is improving. I am sure over the next couple of quarters, we will see the central banks moving towards normalization of monetary policy. That is something investors need to keep in mind. However, if the growth is improving, then that is the right thing to expect from the central banks. Over the last few years, they have been supporting the market through cheap money, but going forward, that would be taken by the global growth as well as the fiscal policy. The other big transition in the world, last few months people are worried about the protectionism or the de-globalization. That we need to keep in mind, but that could actually be prompting growth in a sense that every country will focus on getting the growth in the local market by creating jobs there or investing. One more point I would add, I think the geopolitical risk where everybody is putting their attention, it could also lead to a lot more defence spending going forward in next couple of years. So North Korea will make Japan, Korea, other people fearful, same thing what is happening in Europe, I think everywhere with the isolationist policies of US, global defence spending is likely to go up. That may benefit some of the companies.

Latha: I want to start the question to you from where we began this conversation itself. The reason why markets have done well is not because FIIs put faith in us or our earnings did well. It is just that this huge migration from physical assets or from savings to equity or mutual fund investments, is there any danger to that trend?

Shah: There is no danger to this trend. However, could there be a small speed breaker? Answer is yes.

Latha: As S Naren said, we have almost reached a stage of complacence. So can that complacence get shaken at all in Samvat 2074?

Shah: The complacency is there in the entire mutual fund industry? Answer is no. There is 1.5 crore Indians who are putting money through systematic investment plan (SIP), bringing Rs 5,200 crore. There is Employees Provident Fund Organization (EPFO) who is putting close to Rs 20,000 crore a year, after waiting for so many years to form that process, so that they can invest in equity. Of course in a market as S Naren mentioned, there will be some euphoria, some amount of excitement, some amount of immaturity, but fortunately for us that is very small percentage of the flows. As industry we have also become matured. Today more money is being collected in hybrid funds, we are advising investors to take a longer term view. We are fore-warning investors about volatility which can come into the market. So my guess is that bulk of the flows which are coming in to domestic mutual funds, in domestic equity market, they are matured, they are experienced, and we have seen the proof in November and December 2016 when FIIs were selling and there was dooms day scenario about India, the retail money did not stop. They gave us more money in one month than what we used to collect in entire year. However, as S Naren correctly mentioned, there is some amount of euphoria, some amount of excitement, some amount of immaturity in some lump sum flows. However, I hope they learn the lesson from the others experience and remain invested rather than get panicked whenever there is volatility, if at all there is a volatility.

Latha: Public sector banks or corporate lenders was the sector that you preferred. What about its alter ego, as it were, NBFCs? They have been the big performers. Would you stick with them?

Naren: We are trying to be cautious when any sentiment goes higher. These are sectors where there has been a huge boom and valuations are not anywhere close to being cheap. One of the lessons that the world has learned over the last one decade is whenever credit growth is high at that point of time, in that sector, you have to be more careful and that is our framework. So we see good growth if you look at it in only that segment whereas the rest of the corporate banks are actually growing very slow. So credit growth being higher is actually a sign of risk than a sign of safety. That is why we would be cautious there but that is an area of growth.

Nimesh: You have been known for your contra bets. I understand beginning of the year, you betted to some extent on telecom, now you are betting on the likes of metals and infra. Is that going to be the theme that one should look at now, contra bets where valuations are not yet expensive and there is a hope for growth?

Naren: Yes clearly I would say that the long-term contra bets have actually become tech and pharma. If you look at it, those are the sectors which have done extremely badly, but the point is do we expect them to do extremely well in the next one year or three years. We actually think they will do well in the next three years. So that has become the contrarian bet because if you look at it, those sectors have done very badly and which is why we think the best contrarian bet for a three year view is clearly tech and pharma. In the near-term it would certainly be infra because ahead of elections we see a good boom in that area.

Latha: What about consumption? That is the only horse which is running now. Can it run further, I mean consumer discretionaries, autos, jewellery stocks, other kinds of consumer durables, air conditioner makers?

Munot: Other than some of the other drivers like Seventh Pay Commission payment or maybe with the increased liquidity, they have also been a big beneficiary of the formalisation in the economy where business is moving from informal sector to formal sector, the players who are in organised segment, they are gaining the market share at the cost of the other players. Also, the cost control whether it is input cost, whether the other kinds of costs remaining under control has helped them in terms of improving margins. But surely, I am sure as the growth becomes more widespread, there are other sectors of the economy that will also start doing better.

Nimesh: I was looking at a very nice presentation from you where you presented at the FLAME, changing India and the new themes that probably investors should look at. Give us some examples which investors can look up to over the next few years where the change in India is going to help investors take some right calls in terms of stocks.

Shah: We are seeing three trends which are occurring in India today. The big trend is financialisation of India. On November 8, Indians had more money in currency notes than in equity markets and Dmat accounts.  Hopefully, they have learned from their past experience. Going forward we will put less money in currency notes and more money in bank deposits. So entire financial intermediation sector, be it banks, be it NBFCs, be it microfinance, be it insurance, life as well as general, be it mutual fund, be it brokerages, be it distribution companies, they will all ride on this.

Of course, you have to pick up right stocks, right management, right price, but this is a trend which is going to continue for years to come. The second thing which is happening is formalisation of Indian economy. We were focused on micro, mini, small enterprises, the world towards larger enterprises which were more productive, more innovative, which were more efficient. Now, we are making adjustment for that. So there are sectors like textiles, garments, chemicals, building materials, where unorganised sectors are large and they give unfair competition to organised sector because you do not pay minimum wages, you do not have to bother about pollution and environment, you do pay your tax properly, now windows are coming narrower.

So companies where unorganised sectors are losing their relevance and market share, organised sectors will gain more volume, more efficiency, more margin and those companies should do well. The third segment is that we all know private investment today is on the backfoot and it is the government which is on the front foot in terms of investment. Now whichever sector they are picking up be it road, be it railway, be it defence, be it renewable energy, be it urban infrastructure, in those sectors, we are seeing business, volume and order book. So companies which are engaged in that sector from a technical point of view should do well. So we believe these are the three things, financialisation of India, formalisation of India and the government spending.

Latha: 2017 was the year of commodities. 2018 will be?

Naren: 2018 will be the second half will be the year where earnings come in sectors which have not seen earnings for 3-4 years.

Latha: Tell us which.

Naren: It would include banks, it would include capital goods, it would include power, it would include many of the sectors where there has been no earnings growth, technology, pharmaceuticals.

Nimesh: IT, pharmaceuticals, will that be the next metals for the next year? In the next Samvat?

Munot: Not like metals, but from a beaten down prices, I am sure at some point in time, there would be recovery next year.

Latha: What is your biggest contra bet?

Shah: My biggest contra bet right now is to actually go against the flow and stay invested because clearly we are getting lots of flows and we need to invest this into the market and we have to really work hard to pick up right stocks and maintain the balance.

Latha: What is your biggest contra bet?

Naren: My biggest contra bet for the next three years is IT and pharmaceuticals.

Munot: I think telecom could be interesting. Also the engineering and construction space. Look at the market cap of all the construction companies lower than one NBFC.

Latha: Telecom? You mean you are going to buy Idea and Bharti?

Munot: I will not take the names, but you know there are very few companies.

Nimesh: One trade that you have learned over these years in terms of identifying the stock and in terms of avoiding a stock?

Naren: Clearly good corporate governance and recognising cycles has been what has helped and at times, I have not looked at it and paid the penalty.

Nimesh: I know you have the skill of identifying a good promoter or a bad promoter. Your experience and maybe if you can explain with one example on what you have avoided and what you have bet on purely from a management point of view?

Munot: In India, there are so many examples. You can see 20 years back, so many people started in the private bank space and look at the difference in the returns that they delivered over the last 20 years. So while Charlie Munger and Warren Buffett says that bet on the horse not on the jockey, I think in India it is completely round. In a commodity like cement, you can see the difference what one north based company versus one south based company has done in the last 10 years.

Latha: What is the one trait you will look  in a winning stock?

Shah: The promoter, promoter and the promoter. Does he have values so that he will not cheat me? Does he have vision and execution capability? It is the promoter which makes all the difference.

Nimesh: Give us one example that you have bet on one promoter and which has really worked for you. It is not a stock recommendation, just your experience.

Shah: My own parents is the classical example. In 1985, Uday Kotak started with few thousand rupees and today Rs 1 lakh invested in his company would have grown into hundreds of crore. That is promoter, promoter, promoter.

Latha: Which will be the next Bajaj Finance?

Naren: No, I will not tell you.

Latha: If you can say the next Bajaj Finance will come from which sector?

Munot: In India, across the sectors. We have seen IT has been the worst performing and of our alternative investment fund, one of the stock from IT was the best performing stock last year. Opportunities are there across sectors. You need to buy the right kind of stock.

Nimesh: At this point in time, midcaps or largecaps?

Naren: Largecaps.

Munot: Largecaps.

Shah: Multicaps.

Latha: The next question is a number that you have to tell us. Nifty in 2020?

Naren: I would say our belief has been in high single digit returns over the next three years.

Latha: You do the math. CAGR of 9 percent from whatever.

Naren: 12,500.

Munot: That is like 12 percent per annum, I will go with that.

Latha: You will go with what, 14,000?

Munot: You are talking about March 2020, two and half years so maybe somewhere at the same level, 12,500.

Shah: It will be higher than today and I will take little liberty. Instead of three years I will extend my horizon. 11 years back, today's Sensex was trading at the same level where today's Nifty is. So 11 years ago, Sensex was where today's Nifty is. Will it be unfair to assume that 11 years down the line, Nifty will go where today's Sensex is? You can take your call.

Naren: Just to rephrase, what work we have done seems to suggest that three year return is the biggest problem. 5-10 year returns are good.

Latha: So 5-10 years you will also go with Nifty at 30,000?

Naren: I will not go with that kind of number, but I am saying what our data seems to suggest that three years includes a down cycle after the upcycle is over and that is why the three year return is the most complicated at this point of time.

Latha: What kind of earnings growth this year?

Naren: Over the next two years 30 percent.

Munot: Logical expectation should be 14-15 percent but the aggregate level sometimes gets distorted by few of the companies or few sectors. We have to keep that in mind. But there would be good number of companies that would grow at more than 15 percent.

Shah: Broad market, FY18 mid-single digit. FY19, double digit. But if you can pick up a portfolio as Navneet mentioned, they should be able to deliver 20 percent earnings growth.

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