Moneycontrol
Mar 08, 2017 02:39 PM IST | Source: CNBC-TV18

Liquidity remains strong but expect volatility ahead: HSBC AMC

Tushar Pradhan, CIO of HSBC Global Asset Management (India), is positive on the state of the economy, thanks to the fall in interest rates and improved earnings in the last quarter, "which could be the start of a trend."

The market is euphoric on optimism on expected earnings as well as liquidity coming in from domestic and foreign investors.

“There is a lot of sustenance in DII numbers and liquidity will continue to remain strong,” Tushar Pradhan, CIO of HSBC Global Asset Management (India) said.

However, he added that some gains are pre-empted as earnings for FY17 are yet to come. While market is fairly-valued now, volatility will remain large part of it in the current year.

“It is not a year where everyday will be a better day and where you keep making money on the markets everyday,” he said.

Pradhan is positive on the state of the economy, thanks to the fall in interest rates and improved earnings in the last quarter, "which could be the start of a trend." 

The period of economic slowdown, which started in 2011, has started to bottom out.

Below is the verbatim transcript of Tushar Pradhan’s interview to Latha Venkatesh, Anuj Singhal, and Sonia Shenoy on CNBC-TV18.

Anuj: What are your thoughts on whether the risk reward is favourable right now because we have seen a huge domestic institutional investor (DII) participation from 7,900 all the way up to almost 52 week highs on the index, but over the last few days we have started to see some bit of DII selling? What are your thoughts on whether it is still a good time to participate in this market?

A: It is a difficult question the way you ask because it depends on the term that you are looking at for investing. Clearly, the market generally moves up in terms of valuations in a way that cannot be justified by rational valuations. However, on the other side also, when fear is high in the sky, you find valuations very attractive and that is what the market is made up of. However, if you are an investor in the equities as an asset class, I think any day is good enough because your term of investment has to be defined well beyond long-term and that is how you make money in the equity market.

So, coming back to what is happening right now, I think there is a lot of optimism which has come in by way of expected earnings. I think the last quarter was a very exciting quarter for most corporates in India. Over the period, we have seen that a lot of liquidity has flown in into the markets and as you mentioned, DIIs have been a large contributor and the foreign institutional investor (FIIs) also have turned pretty positive since the beginning of this year. So, I think that is leading to a lot of euphoria in the market at the moment.

However, I would not take too much from the DII numbers going negative to say suddenly are we expecting a fall. I think there is a lot of sustenance in the way the DII inflows have shown in the last year to continue. So, I think it might just be one of those things but I expect that liquidity to remain strong.

Latha: Are you a little worried about valuations at this juncture or are you continuing to get cash and continuing to invest it?

A: In many ways our hands are tied because we are basically investment managers of people who give us money and at all times, on any day, I have to go out and buy if I have money to invest. However, I must say that valuations always are a function of earnings and if you think that the earnings in the last two years have been very tepid, that would be an understatement.

However, we do believe that there is a change in the way the earnings picture will look like in the coming years and from that sense, even if the markets do get overvalued for the short-term, I don’t think it is without reason.

There are two ways that you can look at it. If the market is expensive on the back of subsequent earnings growth numbers in the double digits, or is the market expensive when there has not been any earnings growth in the past. So, I think both of these multiples have to be taken in that context.

Sonia: I was just going through your India opportunities fund and in that, Reliance Industries is one of your top holdings. As the Reliance Jio telecom monetisation progresses, Reliance is now getting to be the big daddy in this sector as well. Is telecom a sector that you like in general or is it purely because of the oil and gas plus telecom play that you are looking at the growth in Reliance?

A: I won’t be able to speak about specific companies, but generally we look at the telecom sector with some trepidation because there is a lot of competition. There is a lot of price movement which is not really very sustainable in the long run. However, these companies have very long-term plans in terms of market penetration and the dissemination of the data revolution in the market and we don’t really know what kind of revenues can be generated at the moment. So, I think there is healthy skepticism in terms of how each of these companies are going to play out.

However, I think what is positive is that there is supposed to be some sort of consolidation in the market. We will have a much lesser player market than before and I think that is also very good from an overall perspective. So, telecom I would think for the moment is not really looking very bright from our point of view, but I think there are other bright spots in the economy which are pretty interesting to look at, at the moment.

Latha: What are those?

A: That would be taking words out of my mouth, but as I said, I am pretty positive constructively about where our economy is right now. So, one of the few things that I can highlight of course is the fact that interest rates have started to come down. It may be believed that because of the overall liquidity in the economy I think they will remain where they are at least for a while.

Constructively if you look at the general way in which earnings have shown to be in the last one quarter or so, I think that could be a beginning of a trend. We are looking at a pretty substantive downturn in the economic cycle starting to bottom out in some ways and in some sectors we are seeing the buoyancy in the sales come back up.

All of that indicates that maybe the period of correction which began probably in 2011 onwards, has started to bottom out and we are likely to see some sort of growth going forward. I will again mention that this is not on the basis of any visible investment demand that we see in corporates, or private companies at the moment.

However, it is basically just the absorption of the extra capacity which was built up over this period of time and we are seeing the operating leverage start to come through in the earnings. So, I think there are reasons to believe that across the market, there are pretty exciting opportunities to look at.

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Anuj: Do you think this space, metals, has turned from being in an extreme fear to extreme greed? In your portfolios, do you have any metal stocks now or do you intend to add any metal stocks?

A: I think it started showing up in our value screen some time middle of last year. Clearly we saw that the prices had been destroyed to an extent where there was almost about a 60 percent drop from the peaks that they had seen even the year previous. If you look at from an all-time high, they are really very significantly down. So, they started showing up on our screens and I think we did increase our allocation into metals mid-way through last year, towards the end of the year.

We have seen metal prices also start to move up pretty smartly. While they have moved up in some cases about a 100 percent or so, we don’t believe that this is going back to the metals super cycle that we saw in the last 15 years; I don’t think that is the case because the big buyer in China is not likely to be repeated in the next few years or so. However, clearly there is some value to the aggregate demand that we see generate in the globe over the next few years or so.

So, I think there is some adjustment that is required and in a sense we just have to look at relative valuations, whether they are versus history or versus the expected demand likely to come in the next two years seem attractive.

We have taken some selective exposure and I think the correct volatility in price movements is always likely to be because commodities in general is a very volatile asset class. However, overall, given demand and supply and where the prices generally are at the moment, I think there might still be some opportunity there.

Sonia: At HSBC how are you guys placed in the retail sector because now with the D-Mart IPO opening up, some of these stocks have come back into fashion.

A: I am in a little bit of I would say dilemma in terms of what to make of it because clearly there is no justification for the valuations that they are trading at. Retail, if you look at the world over or anywhere in the world, even including India, the net margin level, they are not a very attractive business.

They require a lot of capital. However, we have to understand that India is undergoing a dramatic demographic change where a lot of people will be inclined to go into organised retail format and the expansion that we can think of in this area, can be huge. So, it is more of a growth spectrum rather than a profitability spectrum and we do have at HSBC a view to look at valuations versus profitability.

So, in that spectrum, sometimes these kind of opportunities don’t fit in properly, but it is a wait and watch space. If they manage to turn the growth into profitability at some point of time, then the valuations get justified. So, I am not saying that it is a bad thing, but it is just that you need to have an assessment of what the likely profitability of this enterprise is likely and as I said, the demographics clearly support the fact that in this country we can see a retail revolution.

Latha: You have infused a lot of optimism into this conversation, you are structurally happy about the way the Indian economy has panned out, you are happy about earnings, so, what are we looking like, another 2009 kind of year, is this a 15 percent return year, is this a 10,000 year for the Nifty?

A: I think some of the gains have already been preempted as we speak because the earnings have just shown up in the Q3 of this current financial year. We still have March to go to find out how March, how 2017 works out and the hope is of course on 2018 and 2019 now. So, I think much of the excitement already exists in the stock prices right now, discovery now remains to be seen specifically in companies which may not have been discovered and they still trade at relatively cheaper valuations.

However, I think the market has a whole seems to be fairly valued if not slightly higher than its average multiple over the next one year or so. So, I don’t think we are going to look at pretty substantial growth in earnings which can turn into even better returns on the stock market from here on having gone where we are. I do expect volatility to remain a very large part of the market in this current year and those might be just the times to decide which is a good time to enter. However, clearly not a year where every day will be a better day and that you keep making money on the markets every day; that is not likely to happen.

Disclosure: Network 18, which publishes moneycontrol.com, is a part of the Reliance Group.

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