Currently, we are probably in a bull market with some short-term correction is what experts. Navneet Munot, CIO, SBI MF
and Jayesh Gandhi, Sr Portfolio Manager, Birla Sun Life AMC
Both experts are not too perturbed with the market correction, adding that dark clouds are always followed by shining sun.
Munot, says equities is one of the most attractive asset class to put money and market now seems to be giving a good opportunity to do so for the longer-term. "Equities, on a tax adjusted basis, over a longer period are likely to deliver far better returns than most of the other asset classes and people are taking that and there is a long term orientation in the money that is coming," says Munot in an interview to CNBC-TV18.
Gandhi says, people too believe that equity markets in particular will give good returns over the long run and there is a fair bit of understanding that this is a corrective phase. Therefore, long-term investors should be looking at opportunities rather than being worried about what is happening in the market today, he adds.
Talking about global uncertainty, Gandhi says correction in the US equity markets in fact started a bigger correction in emerging markets on back of fear that US which was probably one of the fastest growing economy was correcting. “The top market will always correct at the end and so I again would like to believe that we are probably at the tail end of this correction," says Gandhi in the same interview.
Lack of earnings growth has been the real worry for India in the last one year. However, going forward there will be a big change in trajectory both for the largecap and micaps, says Gandhi. For example, if one were to look at the earnings chart of FY16 or even FY15, one can see that one set of companies are showing earnings over 20 percent range while some others minus 20 percent range. So, when large differentials in earnings outlook narrows you will start seeing earnings growth coming back.
According to Gandhi investors need to keep faith in the stocks and funds they invest in.Below is the transcript of Navneet Munot and Jayesh Gandhi's interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal.
Sonia: When we entered here you guys were telling me that no one wants to listen to us now with the markets falling so much. However you guys are the voices that everyone would want to listen to because retail has invested so much money in this market, what would your advice be to retail investors now post the fall?
Munot: It is just 18 months where people have invested but before that we had 5 or 6 years of continuous redemptions in mutual funds. They also pulled out money from unit linked plans. There were hardly any IPOs; there was very little money that has gone into equities. So, the overall money that has come into the equity market over the last 18 months looked big but it is very small compared to the total household savings. You have to see what is happening in the other asset classes, on a relative basis I still think equities are one of the most attractive class to put money, people have very little allocation and this kind of market is giving a good opportunity to enter from a longer term perspective.
I just heard Anuj saying we are in a bear market, this is I think a bull market correction; I don't think that we can call it a bear market. This is not going to sustain for a long time that markets will keep falling and we will have several stocks touching 52-week low on a daily basis and this is unlikely to sustain the way it has been today or let us say the last week. Dark clouds are always followed by shining sun, this time won't be any different.
Anuj: Have you seen any kind of anecdotal evidence of panic in the retail side in terms of some calls - should I withdraw, should I stop my SIPs or are you seeing a different kind of retail this time which actually wants to take advantage of this fall and wants to buy and increase the allocation to equities?
Munot: In last couple of quarters it has changed. When market falls, typically we get more subscriptions on that day. I think investors are maturing; they are taking a longer term call. Equities on a tax adjusted basis over a longer period likely to deliver far better returns than most of the other asset classes and people are taking that and there is a long term orientation in the money that is coming.
We also hear SIP periods which used to be 1-3 years; people are talking about 10-20 year SIPs which wasn’t the case till some time back.
Sonia: What is the mood like, are people worried about getting into a global recession worldwide or is this just a passing phase?
Gandhi: I would believe that people are supportive of the market. People believe that equity markets in particular will give good returns over the long run. There is a fair bit of understanding that this is a corrective phase. Couple of great themes that we heard today, one of the big ones was that the best returns is made when there is blood on the street. Wouldn't you call the last few weeks that kind of a situation? So, any long term investors would be looking at opportunities rather than being worried about what is happening in the market today.
Talking about corrections and talking about midcaps in particular our sense is that midcaps had not seen this kind of correction for fair amount of time although the large cap market was correcting. So, in a way all segments of the market have to show a healthy correction for the entire market to happen. I think we have got into the second phase of the correction where the midcaps are also correcting. I think from a medium term to long term point of view this is very healthy. What we are sensing from the investors is investors are welcoming this. They would probably want to use this as an opportunity to invest more from a medium to long term point of view.
Anuj: The clear trigger for this market fall was China. We saw the way yuan moved, there was some Chinese data and all of a sudden all markets were scared and there was this fear factor that we are talking about and we saw the impact on the US markets as well. At some point we will de-couple but for now, for how long do you think we will have to endure this pain of these global cues?
Gandhi: Global cues are something that has made the market, especially Indian equities fairly nervous in the last two months. Generally these phases don't last beyond a quarter or so. So, I would like to believe that we are at the tail end of the global uncertain environment.
Let me correct you a bit, my sense is that more than the Chinese currency it was the correction in the US equity markets which saw bigger corrections in other emerging markets and India was no exception this time and the reason probably is that US economy is probably one of the fastest growing in the world and that was one of the top performing equity markets last year and that has started seeing correction then probably it is kind of a contagion spreading across the world.
Remember the top market will always correct at the end and so I again would like to believe that we are probably at the tail end of this correction. We may probably stagnate or consolidate for some period of time but I would like to believe what Navneet said that we are probably in a bull market with some short term correction.
Sonia: What about the large-caps? Good quality names are correcting like it is nobody’s business like ICICI Bank, Axis Bank, Tata Consultancy Service (TCS), Dr Reddy’s Laboratories all sitting at fresh lows. I take your point about some issues in the banking sector etc but is this a good time to be going out and buying into some of these large-caps that are sitting at lows or do you think that one can get better levels in say the next three to six months?
Munot: It is always very difficult to catch the bottom. If you like a stock, if you believe fundamentally it is good it is falling for small other reason – I mean there are two things one is for some of the names there could be genuine issues that in terms of the balance sheet or in terms of near term profitability. However, if you generally believe some good name and you take a structural long-term call, I get reminded by this quote by Howard Marks: “When the knife stops falling, when there is absolute clarity on the horizon, when the dust settles you can be rest assured there won’t be any bargain left.”
So, there is discomfort today because you are worried about China, you are worried about the US Fed is going to do. You are worried about the geopolitical risk. You are worried about then again this asset quality issues in the banks that is why you are getting these valuations in some of these names. However, if you believe that franchise is strong over a longer period things will get sorted out, the government is doing the right things, the economy has got potential; I think India will do well. Some of these companies will do well over a longer period.
Sonia: How do you find value because banks have asset quality issues; IT has slowdown issues, pharmaceutical has USFDA issues so where do you really find values?
Munot: Instead of looking at some of the stocks value put money in my fund. So, on a serious note over the last one year when the market was down, when the Index was down I think several of the funds could deliver decent returns. So, when you look at the profit growth of the Sensex or Nifty or let say BSE 100 and the profit growth of some of the fund portfolios I think that will be substantially higher because it just need to ensure that some of the companies which are dragging down the profitability are not in your portfolio.
This year when you have this kind of indiscriminate selling because of variety of factors, I mean there are some redemptions from the emerging markets (EM) funds and also here may be the retail selling, then you get some of these bargains which you can buy and then wait for couple of quarters, couple of years to make money.
Anuj: What if this is actually worse than 2008. For all, 2008 has become a benchmark and a lot of people come and say that this is not as bad as 2008. I ask what if it is worse than 2008?
Gandhi: We could very well have a situation where for an extended longer period of time, we would go through this consolidation phase. However, at the end of the day companies on their own are doing things to change the trajectory of their own earnings. That will ultimately start reflecting in stock prices. I guess there were two or three key issues but the fundamental issue with the equity markets probably in the last 12 months has been that the earnings growths have been very poor.
Our sense is that next 12 months you will see a big change in that trajectory, both for the large-cap Indices as well as the midcap Indices. You will see substantial improvement and once that factors-in you will have the real fundamentals coming to play. Some of these technical issues and short-term issues will disappear.
Earnings growth is what investor should focus on because that is the fundamental reason why stock price should is what it is and at least for the short-term ignore global news. Most of this may not really affect India in negative way.
Anuj: What if we see because of China or because of US markets any kind of major accident. You have seen for example Brent crude now below USD 30, NYMEX also below USD 30. What if we see some of the sovereign funds defaulting or seeing big redemption pressure? Is that a risk which the market has fully factored in?
Munot: Which is already happening, the world has to realise that oil at USD 100 and oil at USD 30, a large part of the wealth is actually shifting from the oil producers to the oil consumers. Now think from a macro perspective is it good or bad for India? We are getting worried that some outflows can come from sovereign wealth funds but just think of it - how much money this country was sending overseas which will get invested here.
This will be in my wallet; I may use it for consumption I may start saving a little more which will get invested in the country. So, is it good news is it a bad news. If the world has less growth potential - the another thing we have to think that this time the commodity fall is more driven by high supply. This is not a completely demand destruction, because so much of the steel capacity has come up, because so much of new oil shale, alternative energy is playing a role which is a good thing. The world goes through some of those.
Anuj: That also put earnings recovery at risk, is that not a risk then?
Munot: As I said that last year why some of our portfolios could deliver better returns because you need to be conscious about where it is going to add to the earnings and where the earnings are going to get depressed.
Sonia: It is the kind of exposure that these metal companies have to banks. Wouldn’t you worry about that, I mean the kind of increase in non-performing assets (NPAs)?
Munot: That is a worry, isn’t it getting reflected in the valuations.
Sonia: Who is to say that these banks don’t fall more?
Munot: One can always argue how much of that is already in the price and then you adjusted for the franchise value and the markets sometimes forget the longevity of some of these businesses.
On the metals, I think there were some actions expected from the government to stabilise situation particularly in steel. May be at some point in time but it is likely to happen, some of the other governments in the world are doing to protect their domestic industry. May be our government will have to do a little more. Then things should be okay.
However, that is a worry. So, there are worries on the global account on India account – one of the larger balance sheets going into stress, creating a systematic risk for the time being is definitely a risk and that is reflected in the panic that we are seeing in the market.
Anuj: Where do you think this market is going to find leadership to go back towards those previous levels of 9,000 or so?
Gandhi: It is difficult for me to answer the question stock specifically but if you see the earnings chart of FY2016 or even FY2015 it is totally skewed. You have a set of companies which are showing earnings in 20 percent plus range and you have another set of companies and sectors which are showing earnings in the minus 20 percent range. This large variation, large differentials in earnings outlook needs to narrow.
That is where when you will start seeing earnings growth coming back where the hit that the Indices are taking because of lower earnings and commodities and some of the other sectors need to subside. Obviously we have other sectors like consumers discretionary, pharma or IT etc are showing us good growth. That is what we will start seeing in 2016-2017.
The reason why we have not seen in last two years has been because of the big collapse in commodities. When the oil went from USD 100 to 60 we thought that is great. From USD 60 it has halved again. So, from USD 100 it went to USD 50, which was half and then it halved again. Now you could always argue that look from USD 30 can it go to USD 15, yes it can. Nobody can dispute that. However, if that doesn’t happen and we have brought commodity stabilisation at this level then our sense is that next year you will see normalisation of earnings, when that happens you will see quite a few sectors which will take leadership.
Oil and gas is a good example because there the profits are coming back in a big way. Where in significant way would there be benefit for domestic companies consuming some of the metals such as consumer discretionary autos etc. Then we have other economic factors which will boost demand because of say 7th pay commission and whole lot of other government program which are happening. So, you have construction companies and those kinds of sectors, infrastructure led sectors which would really benefit. So, you will definitely find lot of value in lot of companies and sectors which will start demonstrating earnings growth and that is what you should focus on.
Sonia: That is one theme that both of you have spoken about that this is perhaps the best bargain you have got in a very long time. So, take advantage of it. I am going to slice through sectors now, from the large-caps we have seen private banks, capital goods and telecom two to two stocks each that have fallen to 52 weeks lows. All the Index stocks whether it is ICICI Bank and Axis Bank, Bharat Heavy Electricals (BHEL) and Larsen & Toubro (L&T) and Bharti Airtel and Idea Cellular. Now between these three sectors private banks, capital goods and telecom where do you see the highest value?
Munot: Again, if I can put in a different manner that why we could do well last year was that if you avoided corporate balance sheets which have lot of leverage, lenders who have lot of exposure to these people and commodities. Broadly these two or three if you have avoided you could do well. Maybe at some point in time valuations for some of these will also become attractive.
So, some of the names that you talked about didn’t have the place in the portfolio last year but may be some of them are reaching levels where we need to seriously think about whether this is a good time to get in and relative to some of the other stocks.
Sonia: So corporate balance sheet is ICICI bank so am I getting that right?
Munot: Retail lenders have done phenomenally well including non banking finance companies (NBFCs) and some of the private sector banks have done exceedingly well while the corporate balance sheets for the right reasons because there is lot of stress is still in a part of the corporate balance sheet and wherever you had that higher exposure I think the stress is very visible.
However, at some point in time most of it will get reflected in to the price. Just go back and think about and I keep thinking again and again even my team I keep them reminding about the October 2008 to March 2009 and just think and go back and watch that whole move again. How it kind of started and how it ended and where we were in July 2009. We shouldn’t lose sight of that.
Anuj: Do the markets go back to all time highs in 2016 or is that a level that is going to be tough for the markets to achieve?
Munot: I don’t know whether in next 11 months or so but probably 15-18 months, again the stock picking is far more important than the Index level. There are lots of structural factors for that but since we have 30 seconds we can discuss some other time.
Anuj: Let me expand the time horizon, not just 2016 buy middle of 2017 do you see the market going back to all time high?
Gandhi: I would like to believe that they could and you will be surprised how quickly the markets will recoup back. We have seen that in the past as well like the time that Navneet Munot mentioned about the 2009. Very quickly some of these concerns will disappear and we will start seeing markets flying. So, investors should keep the hope and keep the patience. This business is all about keeping the discipline and keeping your faith in the stocks and funds that you invest in.