Even though valuations in India have corrected materially, chief investment officer of Religare Mutual Fund, Vetri Subramaniam, believes that 2012 will be a challenging year for the country.
Even though valuations in India have corrected materially, chief investment officer of Religare Mutual Fund, Vetri Subramaniam, believes that 2012 will be a challenging year for the country. “My broad sense is that the economy may do worst this year than it did last year, but the stock market might not necessarily follow suit, because it's already had its really terrible outing last year,” he said.
According to Subramanium, the market could start performing once the Reserve Bank reverses its monetary policy stance. However, due to inflation still being over comfort levels, he believes RBI action may be delayed. “Also, if Delhi can ensure that the fiscal deficit doesn’t deteriorate any further, then I think at some point the market could catch a bit,” he added.
Going into the new year, Religare MF is cautious on all asset owners in the infrastructure space. According to Subramanium, the infra names are vulnerable because they are very highly leveraged. “However, it is the damage to the confidence of businesses, investors and industrialists that is more debilitating that stock prices,” he said.
For the next two years, that is FY11 to FY13, Religare MF sees total earnings growth in the region of about 11-12%.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.
Q: 2011 was quite awful but do you see the end of this bear market in 2012 at some point?
A: Bear markets or bull markets for that matter don’t continue on perpetuity, so yes I am sure at some point it will start to stabilize. I think the good thing is that the valuations have now corrected quite materially and the other thing that has happened is that expectations have been reset quite lower and quite sharply. So I think that will give the market some sort of headway at some point in the year, particularly if the monetary cycle easing starts to come through. I think the monetary cycle easing may be little bit delayed because I don’t think inflation is still fully under control, but at some point during the year the RBI will have the levy to act on the monetary cycle front.
If Delhi can get its act together on the fiscal front and at least tighten the belt, and ensure that the fiscal deficit doesn’t deteriorate any further, then I think at some point the market could catch a bit.
So I am not hugely bearish at this point of time. There are challenges ahead of us, but my broad sense is that the economy may do worst this year than it did last year. But the stock market might not necessarily follow suit, because it's normally a lead indicator and I think in a sense it's already had its really terrible outing last year. So I think the market might do a little bit better than the economy itself.
Q: What will market turn though, do you think it will be one significant event something like we saw with the Lehman crisis that will then begin restructuring for the market or will we continue in this grind only to add some point turn when valuations hit rock bottom?
A: Well it's always going to be a combination of things. I don’t think it's just one single factor that is going to be a big event, but valuations certainly will provide some degree of comfort to the market. I think a large cross section of the market has now being de-rated quite significantly and we are seeing reasonable values there. But by itself that cannot cause the market to turn around. So yes they will have to be some fuel added to the fire at some point of time.
But again, as I said, the most important thing at this point of time is really that expectations have now being set quite low. We do think there is some risk to the earnings forecast as yet; I think FY13 forecast at 16-18% growth are still way too high and they will be cut. Our sense is that over the two year period FY11 to FY13, total earnings growth CAGR may be more on the region of about 11-12%. So there is perhaps a little bit of cut left on the earnings.
Q: Given the kind of earnings and macro trajectory that you expect, are you expecting a sharp V-shape kind of pull back from the lows of the year, or do you think it will be more of a grind whenever we form a price bottom?
A: I am not even forecasting a recovery in that sense. All I am saying is that we have seen fairly horrible sell off through all of last year, and my sense is that the market will get a little bit more even handed at some point during this year. But I am not really calling for a V-shaped recovery or a U-shaped recovery. So I think it's going to continue to be a challenging year.
Just wanted to put last year’s sell off in some kind of context. If you actually look into this in the context of past bear markets that we have been familiar with, this is actually a very garden variety bear market. From it's high in November 2010 till it's low in December 2011, this market is down only about 27-28%. I think people have a very short memory because if you actually recollect the bull market of 2003-2008, during that entire bull market we actually had two sell offs which were more than 32% each. If you go back and look during pre-2003 bear markets, the average bear market was anywhere between 34-40%.
So in that sense, this bear market has really not gone very far as yet; there could be some more grind left in it. But I just think this is a time where when we look at individual stocks, we are finally getting a sense that there is value to be had in these stocks. Therefore, I think the most crucial thing to understand about last year’s sell off is that it's not just about the damage that has happened to stock prices, but it's really about the damage which has happened to the confidence of businessmen, industrialists and with investors in the market place. So really 2011 is more about the destruction of confidence among economic players in the economy than it is about stock prices having collapsed because we have seen far worst in terms of bear markets over the last 15-20 years.
Q: On rate sensitives, how do you approach this year with specific reference to the banks on one hand and some of these infrastructure names on the other?
A: These are two sectors where we have frankly not been very positive for the better part of the last 12-18 months. There is not much of a changed view on that. As far as infrastructure companies are concerned, a lot of them are still very vulnerable. I am particularly talking about the companies which are asset owners. If you actually look at the market value implied, debt equity ratios of many of these asset owing companies, they are unsustainable at today's levels. You have got implied debt equity ratios of 5:1 all the way up to 10:1. So the market is pretty much telling you that it has grave concerns about the survivability of these companies. Therefore, I think as far as infrastructure is concerned and particularly as far as asset owners are concerned, we are still very cautious.
As far as financials is concerned, I think the challenges there go back to the first point I made on the asset owners, which is that if you got so many companies which fundamentally have a serious issue is terms of their ability to pay back debt, then I think the banking system will have to absorb some of those costs. Are the costs so high that it is going to be systemic in nature? I think not. But there could be some banks which will be affected more than the others. So we are still cautious on the financial space, but again over there there are some banks where the valuations are now starting to look reasonable or you can make the case that the worst case in terms of damage that would happen to them is now already reflected on the valuations.
But these are still two areas where we are a bit cautious because there are mind fields over there. Therefore even if you pick a bank which could come out a relative survivor when the mind field goes off, there will be collateral damage.
Q: What do you expect in terms of cues from the bond market for 2012?
A: You hit the nail on the head. Our sense right through 2011 has been that the bigger issue for this market is not the actions of RBI on mint street, but really the actions of the finance ministry and the government over at Parliament. That’s simply because the fiscal deficit has frankly ballooned way out of control. We have gone from Rs 1 lakh crore borrowing program five years ago to most probably a Rs 5-5.2 lakh crore borrowing program this year and this is just not a sustainable rate of growth in your borrowing program if you are going to preempt so much money from the banking system to meet your short fall in terms of expenditure as compared to revenue.
So really we need to get some fiscal discipline back in place, we need to start to control the fiscal deficit and if we can do that, then there could be some softening on that 10 year bond yield as we head out towards the close of the year. But it's very crucial that we see some signs that the government is getting the fiscal deficit under control. It's not going to be easy because you are entering an environment where tax collections itself are going to struggle, so it's not an easy thing to do, but we are pretty much reaching a point where there is a need for hard action to be taken. I am just hopeful that at some point the political system will respond.
Which was the wild card on 2011? Read on to find out..
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