Indian market looks confident on strong third quarter earnings. As it is marching towards the psychological 20000-mark, Anup Maheshwari of DSP Black Rock Investment Managers is expecting to see a positive trend in the market over two-three years.
In an interview to CNBC-TV18, he said, "We are expecting 15% earnings growth over next 2 years. Consumption cycle continues to remain strong." Maheshwari is betting on large cap stocks with a positive outlook for two years.
According to him, the Reserve Bank of India is likely to cut repo, cash reserve ratio (CRR) by 25 basis points in January policy review.
Here is the edited transcript of the interview on CNBC-TV18.
Q: What is the call on the market now? Is it still going higher on the back of liquidity or are you getting concerned about some of the fundamental underpinnings?
A: We still tend to take a slightly longer term view on markets and our sense is the next two to three years look like a much better phase than we have seen in the last three years and that is quite clear to us. It is going to be very difficult to try and predict whether markets hit a new high in the next month or give a correction later on in the year. Those things, to me, are external factors influencing that.
Generally, our sense is that the two most important variables, interest rates and earnings growth both seemed to be heading in the direction we would like them to head and therefore that is generally positive for the overall direction of the market. It is the structural trend we are more interested in and that is looking a lot better over the next couple of years for sure.
Q: On the second aspect, not interest rates but earnings growth, are you confident that growth is going to pick up this year or while announcements are good and sentiment is better, the pace of change of economic and earnings growth is probably still suspect as we move forward into 2013?
A: We are looking at growth in 2014-15 now and our sense is that after about an 8 to 10 percent range of profit earnings growth over the last three or four years, it is quite likely that we will move up a notch for the next two years. We are looking at more like 15 percent and higher earnings growth over the next two years.
If you actually deconstruct the index and you look through the part of the market that is quite predictable, it is very steady in terms of growth. That is a little over half the index where you are likely to get close to 15 to 20 percent growth in any case and the call we are taking is the balance part of the index which is a little more volatile or linked to what is happening externally. It is something that will start picking up and overall, we will get back to about a 15 percent plus earnings growth rate.
That is the call that we are taking for FY14-15 which gives us the confidence in terms of an earnings growth pick up coupled with some correction in interest rates.
Q: When you say it is a market that should likely trend positive over the next couple of years, are you saying it is the beginning of a bull run for trade and you see those kind of consistent returns and consistent upward performance for the next few years?
A: It is one of those markets where a full-scale bull run is something that requires a fair amount of economic activity to start picking up. We have to be back to a proper investment cycle. I think that is still probably a phenomenon that we would look forward to, maybe in the next year in terms of a bit of pick-up in corporate expenditure. But, for now, the whole consumption cycle continues to be reasonably strong and that is pulling the market along.
Our sense is it is a steady sort of a market that we would look forward to in the next couple of years. If we do get the catalyst for a much higher performance, that is great, but I think we are going with a view that it would be a good steady asset class, at least over the next two to three years.
Q: Is it time to switch portfolio around significantly though? Technology is a good case in point. It looks like a lot of people got caught on the wrong foot with stocks like Infosys and now there is a rush to buy?
A: I think one of the biggest challenges for portfolio managers like us this year is going to be to try and outperform the index, given the fact that a lot of large caps have underperformed in the last few years and these are large index weightages and most funds are underweight on those names. You have mentioned Infosys clearly as a case in point as a rather extreme example, but there are a number of other names in the index that have not done much. There are also potential catalysts for them to start performing because we are looking at slightly better numbers coming through next year and the year after.
There is a bit of thought that we need to give across the portfolios in terms of the fact that the constituents of the market that have performed in the last few years may not be exactly the same for the next couple of years. Therefore, you need to make adjustments. There is a lot of bottom up work that needs to be done over the course of the next two years to try and make sure that one continues the trend of outperforming the index, as most funds did last year as well.
I think that is the big challenge. We have to look at underowned sectors, we have to look at large cap underowned names and keep a very close eye in terms of any changes in their trends.
Q: The sad story of 2012 has been that mutual funds lost so much money despite a year where equity funds delivered such good returns. Are you seeing any first signs of turnaround in 2013 on that front, or it is still a very sluggish going?
A: We have got a lot of work to do for that. It is still not looking great. I would say that the intensity is reduced, if that’s any consolation. The fact is that we would like to see money come in because this is a phase where they are a lot more confident about markets and equities as an asset class.
It is a little sad to see markets going up and investors redeeming. We have just got to keep working on it. The general hope is that markets just play a more steady trend this year and hopefully, we could see some degree of maybe high net worth flows to start with, followed by retail flows eventually.
Q: The tactical challenge that fund managers like you will face this year because some of these stocks like Infosys is the case in point this year, if a lot of people were underweight because of the performance of the last year. In one day, you have missed a 20 percent rally on a stock which has 6 percent weightage on the index or the benchmark. Such things could happen maybe with Reliance which has not moved in two years. As a fund manager, what do you think you would do because these days it doesn’t take a long time for an underperformer to unwind a lot of the underperformance of the previous times? How do you approach these kind of names?
A: You really have to keep looking at the risk reward of stocks constantly and pretty much try and gauge at what point in time you believe everybody is reasonably negative and things are priced in and the stock is not responding as much to negative news as it was before. Especially, at event points like results season or any other catalyst that can come through.
You have to be very sensitive to those points particularly and make sure you are better positioned ahead of that. You are not going to get these timings right. It is easier said than done and most of this comes with a hind sight. As a general practice, I think in any which case one is reviewing all of those positions, trying to readjust weightage if you are severely underweight and running a risk where there are potential upsides or the prices are not underperforming as much as it was before.
That’s just a constant investigation that you have to keep doing with a clear focus on some of the large names so that you don’t miss any one of them.
Q: How important is monetary action going to be to determine the market’s next move?
A: In the short run, expectations are pretty high. Fixed income markets are pretty much factoring in something like a 50 basis points cut. Our own feeling is that it will probably be a 25 basis points cut in CRR and repo rate. But, more than the actual number and how the markets are going to react on that particular day, as I mentioned earlier, we are more interested in the trend.
As a trend, hopefully interest rates are now in a bit of a declining mode and that trend will tend to last for a while. In that sense, we are quite optimistic and positive because that’s one of the biggest rerating agents for equities. When we look at equity market valuations today at around 14 odd times on next year’s earnings coupled with the fact that interest rates are coming off, that gives us the comfort to go out and start recommending equities a little more aggressively as an asset class that can outperform, probably debt at least.
Property, gold etc are very complicated asset classes. Gold generally looks like it now doesn’t have the same momentum as it had earlier. Property is a very different asset class to compete or to convince people on. Equity, as a standalone asset class is looking a lot better in that sense.
Q: There is a school of thought though that believes that the decision is not that easy for the Reserve Bank. Inflation numbers are volatile to say the least. They have got the Budget coming up but they don’t know what comes through. In the second half, the election as well could be quite an expansive policy and hence it is probably 25 and not an easy 25. How do you think the market would react to that, either if it is just a 25 bps cut or if it is a very hawkish commentary that comes in? Could it lead to a big correction you think?
A: As I mentioned, I think the markets are anticipating a higher cut. To that extent, if people’s expectations are running higher then clearly the response won’t be that great if it is just a 25 basis points cut. But, it’s just the timing element because clearly our sense is post the budget, there will be another review in March and at that point in time perhaps we will get another cut depending on what sort of fiscal deficit the government will present in the budget. So it is more of a trend.
Over the course of the year, we are looking at somewhere between 50 to 100 basis points as a cut, which I think is good. If everyone is anticipating a tough front, then there is room for disappointment. I think it would be more measured over the course of the year.
Q: What is the risk as we go into the middle of this year, somewhere in June-July? The market looks at two more quarters of earnings and then says that earning are not quite moving at the pace at which stock prices have moved. The investment cycle is still sputtering, numbers have not picked up, any momentum is still not visible and then with where valuations are, it looks on hind sight it is more of a liquidity propelled story rather than a fundamentally backed one. Is there a risk of that this year?
A: What’s giving us comfort is the fact that this is not an all out bull market, where every single sector is performing. Valuations are stretched across the market pretty much. That just gives you the feel that this is not something that will be a market that can go through a massive correction at some stage where everything starts derating all at once.
It really continues to be a very bottom up market. In our opinion, it is a good market in the sense of being able to pick stocks, it is more mature in its behaviour. It is not a runaway bull or a very extreme negative market. So everybody is a little more measured in their views. There are enough bottom up stock opportunities going through. There are a number of stocks that have underperformed where there are catalysts for them to do better.
In that sense, we see it as a fairly constructive period of time. Our concern, if at all, frankly is more external and that would be if in the middle of the year interest rates globally, particularly in the US, turns marginally as there is a trend of declining rates or very low rates. I think that could help implication on global flows or currency movements or the way Japan potentially is going to run into a current account deficit and capital flows could get affected there.
I think those sort of global flow issues could have an impact on flows generally into emerging markets. That’s something that could have a bit of a rub off effect in the near term here. When we look at it on the ground, you need corporates. I have got to say, things are relatively steady. Not everyone is very happy but, there are pockets where you can still find enough value and good potential from a stock price perspective.
Q: Aside from getting the belief going in equities again, what would you say in defence of equities versus fixed income? Is there a case to be made saying that 15 percent earnings growth over the next couple of years from equities is a far better return than you can get from fixed income over the next couple of years?
A: I am going to give a biased view because we like equities a lot. My sense is that over a two-three year period, equity should be outperforming fixed income. Initially, fixed income also does well at least at the long end as rates go off. We have already seen some of that in the last few months.
But, our sense is that equities will respond more positively and eventually as earnings growth picks up again, I think equities will start covering up for some of the underperformance of the last four-five years in particular. By default, we think equities should do better than debt in the next two-three years.