Dec 15, 2012, 05.04 PM | Source: CNBC-TV18
Ace fund manager Prashant Jain of HDFC Asset Management feels retail investors are making a mistake by constantly redeeming from equity funds.
Prashant Jain (more)
ED & CIO, HDFC Mutual Fund |
Historically, Jain says, the bulk of the money, almost 80-85 percent, always comes in at higher than 17-18 (Sensex) price-to-earning multiple (P/E) multiple. "We never see inflows at low P/Es and when markets begin to recover. Instead we see outflows because people who feel they have been trapped, and now some returns are there, they are taking out money," he told CNBC-TV18 in an interview. He says that is why investors get disappointed with equities time and again.
Investors seem getting more and more cautious as the market is approaching 20,000-mark. The general consensus is that this is a level where one should be booking out and not making the mistake of getting into another high. However, Jain thinks otherwise, "When you look at the history of the Sensex, it has delivered 15-17 percent compound annual growth rate (CAGR). It started off with 100 way back in 1980. At any point of time, we thought 1,000-2,000-5,000 was high. It was a wrong way to look at the markets".
The correct way to look at the market is to focus on the P/E multiples, Jain says. "Investor should simply practice low P/E investing and whenever P/Es are below average, they should keep on investing with two to three-and-a-half year's view. They should either reduce allocation to equities or not invest more money when P/Es are high again with a two-three-four year view. That will lead to better timing than what they have historically been able to achieve," he reiterates.
Below is an edited transcript of the interview on CNBC-TV18. ALso watch videos.
Q: Do you think retail investors are making a mistake by constantly redeeming from equity funds instead of putting money in now?
A: I have been in this market for 20 years and I have seen three cycles now. Unfortunately, in each of the cycles, the timing has been quite bad. The bulk of the money has always come in at higher than 17-18 P/Es and we have seen that repeatedly. Almost 80-85 percent of the money comes in above 17-18 P/Es. It is probably unfortunate, but in my opinion, these are the signs that history is going to repeat itself again.
Q: Are you beginning to see any nascent signs of that in any fund because it is the midcaps that have begun to perform etc? Are you beginning to see more interest perking up in some of these sector-specific or vertical funds?
A: Broadly, the industry has been losing money. We never see inflows at low P/Es and when markets begin to recover, we see outflows because people who feel they have been trapped and now some returns are there, they are taking out money. Almost 80-90 percent of the money over a cycle comes in above 17-18 P/Es and that is why investors are time and again disappointed with equities.
Q: The feeling from a lot of retail investors seems to be that we are approaching 20,000; this is a level where you should be booking out and not making the mistake of getting into another high. Is that kind of an approach a mistake?
A: I think so. When you look at the history of the Sensex, it has delivered 15-17 percent compound annual growth rate (CAGR). It started off with 100 way back in 1980. At any point of time, we thought 1,000-2,000-5,000 was high. It was a wrong way to look at the markets.
The correct way to look at the markets to my mind is to focus on the P/E multiples. Investor should simply practice low P/E investing and whenever P/Es are below average, they should keep on investing with two to three-and-a-half year’s view. They should either reduce allocation to equities or not invest more money when P/Es are high again with a two-three-four year view. That will lead to better timing than what they have historically been able to achieve.
Q: The problem with a lot of investors is that they look at the rear view mirror and they say last five years have not been great and therefore we should not be buying this asset class. Do you think that having seen so many cycles, we have just gone through a bad cycle, which is about to turn for equities?
A: Equities are very hard to forecast over short-term to medium-term period. You should take a two-three year view. That is what I would see; I am coming basically from low P/Es. Interest rates are peaking out and India’s growth also should improve next year. Oil prices seem to be stable. Therefore, the pressure that rising oil prices put should start reducing. The worst of current account fiscal are behind us. Improvement is slow but we are improving on that front.
Overtime P/Es have room to go up and earnings are in any case growing. Yes, I would agree with that view that if you look at last five years, that is an incorrect way to approach the markets. In fact, you should do just the opposite. When market do not do well for last five years that is when P/Es are low and that is when you need to allocate more to equities and vise versa. Unfortunately, what happens is just the opposite.
Q: Can you say that with confidence though; that you are seeing signs of the earnings troughing out? What kind of earnings performance would you pit for next year if you expect to see better returns?
A: The accurate forecast of earnings is not possible but I do not think it is very important either. Earnings estimates are between 12 percent and 18 percent growth—anywhere. So earnings of Sensex could be Rs 1,350 or Rs 1,400. I do not think that is the key issue. The key issue is that P/Es are broadly at around 14 odd times—could be 13.5, could be 14.5.
In one year from today, we will be focused on FY15 earnings and that is the way to think that those P/Es will look in one year maybe 12 odd times and that is why I think the risk-reward in the market is favourable and the downside is limited to my mind.
Q: Some market watchers also point out to the urgent need to improve the domestic liquidity environment, i.e. more front-ended rate cuts. A big chunk of your exposure is to the financials. Would you agree with that that the linchpin is what happens with rate cuts not so much the rest of it?
A: I think we need to do lots of things and now the direction is right and government is clearly focused on improving the policy framework. Fortunately, the oil prices are stable and interest rates also have a role to play and overtime interest rates will move lower. How much and to what extent and when exactly that happens, I would not like to guess that but it is safe to say that one year from today, interest rates should be lower than where they are currently.
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