With the macro environment, both globally and locally, deteriorating, the outlook on equities remains uncertain. However, DSP Black Rock's Anup Maheshwari believes that conditions don't remain the same forever. "We have always got to look at opportunities in times like these that you find better value in the market as well," he said.
In his view, the market condition may turn for the better next year. "With the rupee giving way, in a sense, it is a good catalyst for things to start improving. Something had to give way, that has come through in the currency and hopefully that will now lead to some repair on the deficit side."
Below is an edited transcript of Maheshwari’s exclusive interview on CNBC-TV18. Also watch the attached videos.
Q: It has been a bad May series and June looks like it is up in the air. How are you approaching the market as a fund manager now?
A: This is a time where patience is tested clearly. The outlook on equity seems to be fairly clouded, which has been largely driven by the fact that, globally as well as locally, the macros have been deteriorating. But at the end of the day, the conditions don’t remain like that forever. So we have always got to look at opportunities in times like these that you find better value in the market as well.
I think a few important things are happening now, which give us a little more confidence that we will have better times ahead probably next year. Firstly, we have gone through a situation where a series of macro accidents were taking place. So the news is just getting worse. But now with the rupee giving way, in a sense, it is a good catalyst for things to start improving. Something had to give way, that has come through in the currency and hopefully that will now lead to some repair on the deficit side.
Hopefully, we will lead to some more policy action by the government, which people have pretty much given up on. I think the macro will, gradually though it doesn’t turn quickly, but it will start repairing itself. So probably the scenario may improve a little bit maybe six months down the road.
Q: So next year it is, you are writing off the rest of this year, not likely to be pretty just like 2011?
A: Not writing it off. As I said, there are enough stock opportunities. We cannot bracket every single business under the market perspective. It is just that it is a difficult environment for equities to rerate upwards; that is fairly obvious. So it continues to be rangebound as it has been for quite some time now. This type of time correction makes the market cheaper; essentially that is the scenario we are looking for. But it is through phases like these that you have to turn more optimistic eventually and look for opportunities and businesses that are probably being punished or not given the right value. It is phases like these that will eventually produce strong returns in the future.
Q: How are you tailoring your portfolio right now? Is there a skew towards either exporters or defensives just to ride over this rough phase or are you taking valuation call on the beaten down stocks?
A: We had a slightly defensive stance for some time but we are looking to change that now gradually. We would rather have the portfolio somewhat balanced out. We are definitely looking at some more value names again and the comfort of buying defensives is now getting outweighed by the fact that valuations are on the higher side.
We are also seeing consumption slowdown a bit. Our feeling is we would rather have a more balanced portfolio. Six months down, the road as we start getting much more optimistic on markets, we would like our portfolio to be better positioned for that eventually.
Q: Even if there is a valuation argument to be made for specific stocks or sectors, are you getting the sense that there is more to go in terms of headline price damage itself? Does it seem like at the end of the year, we will have the markets trading significantly lower or will the second half just be about marking time around here?
A: The short answer to that is I do not know. Frankly, it does look like there is a time correction required because if markets go up 10% they get overvalued quickly for the data which is in front of us. So it’s difficult to sustain market moves upwards. But at the same time, as it declines, there are either two scenarios; it gives one sharp selloff or ranges around for a bit. But either which way, we have to look a little beyond this because that’s the opportunity.
I think investors should be now getting more interested and looking for price declines so that they can buy stocks cheaper rather than getting terribly fearful of price declines at this stage. I think that can happen that is the nature of the market. You can see selloffs or markets trending nowhere.
We do not know exactly how that is going to pan out. All we know is that as valuations gets cheaper; it’s definitely getting more interesting to look at equities, which hasn’t been the case for some time now.
Q: Someone was pointing out that this big fall in the rupee has caused a freeze up in domestic money as well, not just the kind of overseas money we are getting. Has that been your experience and do you think that is the big problem here?
A: Yes, from a fund flow point of view, it has been quiet. Domestically, we have not seen flows. In fact, even on the international side, outflows started picking up in the last month or so. It’s been our experience on some of the funds that we advise internationally. It is very logical at times like this – it is typical what you would expect to happen as the currency gets weaker, you will see some international investors also getting increasingly worried and withdraw some money. So from a flow point of view, it’s not a positive sign but from our experience, flows are not an indicator of what is to come also. It is more outflows than inflows, is what I would say.
Q: When does growth trough out in your eyes because that’s a longer term call. Right now, we are dictated by events happening in Europe, the way the currency is in freefall but eventually what kind of growth, we see economically and in earnings will determine prices once the dust settles. By when do you think we will start on a slight process of improvement there because right now the process of marking down GDP growth or even earnings growth in many sectors still seems to be on?
A: That will be on for a bit. By the time markets bottom out, your growth trough is still six-nine months. You are pretty much in the last phase of your growth trough. But the data will not support markets rising supposedly or optically when markets are at their lowest point, which is why they are at the lowest point in the first place. There will still be a lot of negative news around.
So our sense is the macros will repair in a very gradual fashion. We will still some bad headline news on GDP etc in the next six-nine months. But the process of repair, as I said, the small things have started happening, which give us little more confidence that maybe a year down the road, things will be little better than they are today. In the intermediate term, you will see some negative headline news irrespective. But the fact is markets will respond to that earlier than the bottoming out of the headline numbers. Stock prices will more than reflect that at some point in time. Therefore, we are more focused on the markets than just the headline macro numbers.
Q: There has been a lot of newsflow on autos - first the petrol price hike, talk of a special duty on diesel vehicles and now the Tata Motors’ numbers.How are you positioned on the sector?
A: We are overweight on autos but we don’t have necessarily the same stocks there in the index. I think we have little more of the auto ancillaries within the auto spectrum, which is why our weight is slightly higher. But it is not a very large weight in the index anyway, autos is about 5%. So we are somewhere in that region with a little more of auto ancillaries.
Q: Where is it that you would buy now if you are looking to diversify, not have much exposure to defensives, what kind of spaces are you looking at?
A: We are looking at value ideas and we are buying in a fairly measured manner. It is not like we are jumping in full scale because the market is giving you that opportunity. It is not running away at any stage. So we are looking at it – unfortunately, normally we have very strong sector views that we come here and express in terms of clear overweights and underweights. But at this point in time, it is not so much sectoral as it is stock specific. Unfortunately, we are not at the liberty to talk about stocks but it is really very bottom-up right now. So we are looking at value plays; again going back to low price to book NIMs, looking at potential where in at some stage return on equities (ROEs) can recover or ROEs of these businesses are way below what their average return on equity is. So that is the criteria on which we are trying to look for some value in this market.
Q: You have quite a bit of broader market exposure though via your midcap funds in fact you have a microcap fund as well, what has your takeaway been from earning season this time especially for the broader market? What do you reckon will happen with this broader market’s phase generally through the course of the next few months?
A: The earning season oddly enough has not been as bad as people thought when we started this earning season. In fact, earnings have turned out to be a little higher and a fair number of companies have outperformed their earnings expectations at the start. Overall, I think we have done north of about 10% earnings growth for this quarter. On an average, I haven’t seen any big changes in next year’s forecast in terms of any further downgrades.
In fact if anything with the rupee weakness, there is some scope for overall earnings upgrades at a Sensex or an index level. From an earnings point of view, it hasn’t been all that bad and there have been some positive surprises. So nothing from that perspective, there is some degree of stock specificity so you have had some stocks where if earnings are even slightly disappointed. They have been hit a bit but conversely most other earnings have been reasonably okay.
So it is not so much earnings, I think it is more just the P/E of the market and the valuation that is the issue. What is the price that you would pay for the earnings and that is where we are seeing generally the market as a whole trending a little lower.
Q: The problem is one of patience out here. Last five years, people have not made too much money from this asset class, your point is taken that on the margin, things might improve six-nine months down the line. But it would be a legitimate fear to think that this gets strung out another couple of years and people again don’t make too much money from this asset class, could that happen in your eyes?
A: That is the thing about equities. One is you have to have bucket loads of patience but it does reward you for patience. We know that as well, we have seen enough cycles too we are quite clear on that. Clearly, when you look at returns from a peak market or a top of a bull market, it will look bad for some period of time. It has to as the market plays itself out.
But like you said, it has been four-five years now, so it is fairly obvious that the investors are very tired with the whole thing. But unfortunately we have seen this in the past, at times like these that much better value emerges, stocks are a lot cheaper, the businesses are the same, it is just that you have gone through some macro issues and disturbances but all of that we will sort itself out eventually, we know this cannot go on for the next five years for instance.
Whenever equity does a rebound, it will be a combination of both earnings growth and P/E rerating eventually. So you are right, it is a patience game. We don’t know when that is going to happen, whether it takes six months or a year. But the fact is it is better to take that view and to have a balanced asset allocation at all points from our experience rather than being very skewed at various points in time. So the easy thing to do right now is to be very low in equities and very underweight in your overall asset allocation but that is not necessarily the correct thing to do.
Q: I know what your answer will be to this, that timing is impossible but maybe investors are saying that in this kind of environment, which is full of risks that we are staying in today, we are living in today, who is to say that we don’t get a leg of capitulation like 2008 and for longer-term investors that would be the opportunity to get in. Do you think we will get that or is it prudent to just start nibbling at these kind of valuations?
A: Capitulations can happen. We have seen this in the past and you have both global as well as local issues, markets can behave rationally in the short run and oversell themselves. That is possible but the question to ask is how many people end up buying into a capitulation. Past history doesn’t suggest a very good track record of people buying into such capitulations, you tend to get even more fearful.
So I think the easier way to end up owning equities is to keep at it steadily in a disciplined manner. That just seems to be an easier way to play the whole thing out rather than trying to wait for a capitulation and then believing that you will go and heavily invest into a capitulation, which very rarely happens. So you just have to pretty much catch the phase rather than the precise point. We think we are in that phase and if we do get a capitulation, it is probably good because there will be an opportunity to keep adding at lower levels as well and it won’t stay down forever that is quite clear as well.
Q: Does it look low that we are going to have to suffer with this underperformer tag for much longer because of the one-two punch we have got both with local problems and the way things are globally?
A: Yes, it is quite possible. Also given the fact that our valuations unfortunately are still relatively higher than what we have seen in most of the Asian region. So I think that is the real drag for the markets to be able to perform.
Today, India is still relatively quoting at a higher valuation than most other markets and our ROE or profitability premium has reduced. So in that sense, there is a bit of a drag. As global markets remain weak, there is no reason for India to go up and to some extent this underperformance could continue for a bit.