The market has rallied around 30 percent in the last six months, so a few percentage point correction should not be worrying says Harsha Upadhyaya, CIO Equity at Kotak Mutual Fund.
In an interview with CNBC-TV18, he said that investors looking to put money into equity should be ready to bear intermittent volatility.
The fundamentals of the Indian markets have turned positive in the past few quarters and this momentum is likely to continue, he added.
Below is the verbatim transcript of Harsha Upadhyaya’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Anuj: The million dollar question, is this the correction that is a buying opportunity or are you sensing some global headwinds which could take market lower and we could probably have our first real correction of this current bull run?
A: We haven’t changed our view on the markets yet. After having gone up almost 30 percent in last six months, if we see few percentage points correction in the market, we should not be really worried and anyways we approach markets from a long-term perspective. Equities are never linear in terms of their movements, so, to that extent any investor who is coming into equities should be ready to withstand intermittent volatility.
Overall the fundamentals of Indian markets have turned positive for last couple of quarters and we believe that momentum will continue going forward and you will always have some amount of jitteriness given we are globally linked. However, overall, we believe we are in a very good shape.
Latha: At current levels, are you adding to any of your favourites? We are getting very down beat news from the consumer goods companies about the festival buying, as well the macro numbers are not much to write home about, will you worry about buying at current levels even if you are not going to sell any of your stocks?
A: As you mentioned, we are not likely to sell anything from our portfolio as yet. As far as buying is concerned, we are not sitting on too much cash anyways so to that extent we will be more gradual in our approach. We believe the corrections and the volatility that is there in the market will give us an opportunity at some point of time and then probably we will look at buying some of the stocks if they are available at lower valuations.
Sonia: Since you are optimistic on the markets and we are headed into the earnings season as well, from now say over the next three to six months, what are the pockets you think could offer good value to investors?
A: We have not changed our portfolio positioning at all. We believe that consumption growth is likely to be strong. We have seen seventh pay commission pay also coming into the hands of consumers. So, urban and semi-urban growth should continue to remain strong. Similarly, monsoon has almost been over and it is more or less okay; only 14 percent of India has seen deficient rainfall, rest of the Indian region has seen reasonably good and normal monsoon. So, rural economy should also perk up.
Given all this, we believe consumption growth will continue to remain strong. The second segment where we are positive is the revival in infrastructure spend that is happening. We believe cement is a great play to actually play that uptick.
Anuj: If you look at the top 10 holdings, it is all banks and consumption, cement, autos and private sector banks. However, in terms of any other spaces, do you see leadership emerging out of these three pockets, these two or three pockets or do you see the market leadership firmly staying with these two or three pockets?
A: Along with these three or four, we also believe oil and gas can definitely outperform the markets. We have seen a significant reform in that particular sector a couple of years back and those reforms are continuing. We have seen government trying to deregulate LPG and even kerosene; they have already started monthly price increases. So, at some point of time you could see deregulation in LPG and kerosene as well.
Let us hope for that and in the interim, the cash flows and the profitability of oil marketing companies have significantly gone up, their balance sheets have strengthened and we believe that is a decent pocket to look at to investing for the future as well.
Sonia: You don’t have too much of an exposure to the metal space but I am still going to ask you your view because Tata Steel is in focus today after what looked like a decent set of numbers. However, commodities as a whole are under pressure. Is this a pocket that you still stay away from or do you see some opportunities here?
A: We have avoided metals for almost two years now and we continue to remain circumspect about the overall global metals and global commodity cycle. At this point of time, we believe some of the domestic businesses which have better earnings visibility, will give us better performance from a portfolio perspective and we are avoiding almost all metal stocks across our funds.
Anuj: A generic question on the kind of fund flows that we have seen. What kind of money inflow are you seeing in your funds, is this at record highs as the market has moved closer to record highs?
A: I won’t say it is record high but clearly the inflows have been quite strong. We all know about how the SIP market has developed. We are seeing about Rs 3,000 crore every month only through SIPs. There are some lump sum investments as well which are coming into the market.
So, overall it has been a decent inflow that we are seeing in equity mutual funds and that has not changed over the last few months as well. So, we continue to believe that the low level of equity penetration that is there in Indian households will gradually move and hence we will continue to this kind of low continuing.
Sonia: At what point do you start buying into technology stocks, I know you are underweight in this sector but you still have Infosys as one of your holdings? Do you think at some point these stocks will start to become a buy again?
A: At some point yes but not in the immediate short-term. In the immediate short-term we have been seeing some profit warnings and some cut in guidance, etc. So, I think overall this phase looks vulnerable even getting into the second quarter. The noise around Brexit will start to increase as we head into calendar year 2017 as well. So, for the next couple quarters unless there is a significant correction from the current levels, we are unlikely to really increase our IT weightage in the portfolios.
Latha: Where do non-banking financial companies (NBFCs) figure in your scheme of things?
A: We do have couple of NBFCs in our portfolio but those NBFCs are all consumer facing NBFCs. We believe the retail focus businesses, whether it is NBFC or a private sector bank, will continue to have incremental growth and this will be at the cost of some of the public sector banks who are not very strong on the retail side. We have festive season coming up, hence, the consumer spend will continue to remain strong on some of these retail private sector banks and consumer finance NBFCs which are enablers for discretionary consumption spending will continue to have good growth in our opinion. So, we continue to hold them.
Latha: What about the many new entrants in the finance space generally, I don’t know how to categorise them – small banks, NBFC companies as well, the myriad ones, the Ujjivan’s , Equitas, RBL, is that something that is going to take an outsized portion of your money?
A: Not an outsized bet but we do have some position in one of the microfinance institution (MFIs) which has recently become a small finance bank. We believe the growth rates in this space will continue to remain very strong although one needs to be cautious in terms of how the credit costs are going to inch up as they start growing further in the same business.
Also, one needs to watch out how they build liability franchise once they become a small finance bank because until now they were only doing the lending business and they were not looking at really getting into liability franchises. So, now that will be a very critical factor to differentiate between which of the MFIs will actually turn into small finance banks and successful small finance banks in that sense.
Anuj: The sector that has destroyed wealth is telecom and we will have a new aggressive player as well. Do you see more de-rating or are these stocks presenting a buying opportunity?
A: That has been our view for quite some time now and we haven’t really changed our view given the fact that the competition is only starting to hot up now. We continue to believe that already depressed return ratios in telecom sector will continue to remain depressed. We are going to see recurring spectrum charges which is a business investment for most of the telecom companies. They will continue to invest in spectrum irrespective of what is happening in the current business because they have to compete in the market.
Also, we have seen the kind of price wars that have come into the market. So, the profitability will continue to remain under significant pressure and we don’t see any change in our view on telecom as yet.