Good time to build a 3-5 year portfolio: IIFL's Nirmal Jain

Retail investors have moreless stayed away from the market during the rally of 2012 and most part of 2013 so far.   

According to Nirmal Jain, chairman of IIFL, retail always follows the FIIs and instiutional investors in general, but only when there is a broad-based rally.

Also Read: WPI inflation may jump to 6% if rupee ends yr at 57: Crisil
"If you see the trend, the big dip in the market and the big rise in the market, are all led by rupee, which in turn is led by FII money, which in turn depends on sectors like crude oil prices and sometimes domestic crisis aggravating or elevating it," Jain told a gathering at CNBC-TV18 Investor Camp.
He says the US economy, which was the epicentre of crisis, has done well and its currency is also outperforming most of the currencies. "That shows that how well they have managed the crisis," he says.
In last few days and few weeks, the market has seen a reversal in FII flows. Jain says most of FII money that has come in last one year has been from exchange-traded funds (ETF) and emerging market funds.
"I do not know of any India-specific fund that has been able to raise any significant or any material money. This is in contrast with 2004-2005 when there are number of India funds and they were getting money that was dedicated and meant only for India," he says.
In such market conditions, people who are willing to wait for three to five years can only make money, says Jain.
"If you have money that can wait for three to five years then you may start building a portfolio now. The valuations like this are very, very mouth-watering for an analyst," he says.

Catch transcript of Nirmal Jain's address at CNBC-TV18's Investor Camp on next page

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One peculiar feature about foreign institutional investor (FII) investing has been a very few select stocks and concentrated bets on fast moving consumer goods (FMCG) or some pharma stocks, some private sector banks and a couple of IT stocks. Retail investor follows FIIs, follows institutional investors, but only when there is a broad based rally and even in this entire rally of 2012, most of the midcaps and small caps have not made money.
There are selected midcaps like Sun Pharma that are now heading towards becoming large caps. If you see the trend, the big dip in the market and the big rise in the market are all led by rupee which in turn is led by FII money which in turn depends on sectors like crude oil prices and sometimes domestic crisis aggravating or elevating it.
With regards to global economy, our markets are dependant and will remain so, depending on flow of FII money. US economy is recovering. US economy which was the epicentre of crisis has done the best and their currency is also outperforming most of the currencies, not only Indian rupee and that shows how well they have managed the crisis.
The consumer confidence in the US is also stable, not aggravating. FII money holds the key and in last few days we have seen the positive trend getting reversed. Most of FII money that has come in last one year has been from exchange-traded funds (ETF) and emerging market funds. I do not know of any India specific fund that has been able to raise any significant money. This is in contrast with 2004-2005 when there were a number of India funds that were getting money and was dedicated and meant only for India.
India faces multiple headwinds at the macro level. Considering our current account deficit (CAD), in absolute terms it is second only to the US and relative terms at around 5 percent of gross domestic product (GDP). Last quarter South Africa was worse, but this is one of the worst for such a large economy.
Even in 1991 crisis when we almost became bankrupt, the CAD was around 3 percent. That time we did not have capital flows on account of FII money and foreign direct investment (FDI) and therefore, we went into a crisis. But a situation where we import more than export and we finance those imports by FII money which is volatile and hot money is not a very comfortable situation and has no near-term solution. That is why rupee will remain volatile and therefore, FII money will remain volatile and hence our stock markets will also remain volatile.
So, we see 5 percent GDP is scary and precarious. There is some achievement on fiscal deficit, but there are number of underlying things at state level, the subsidies that are not counted and still there is a long way to go before we say that our fiscal position is healthy from a long-term macro as well as country's rating point of view. Our quarterly GDP data has disappointed and this is something that was seen a year-two years ago as well as the investment cycle, particularly the private sector investment cycle had almost collapsed.

The big question is will the GDP growth bottom out soon and how do we see things from here? In last two-three years we have seen that investment was not doing too well, but the entire economic growth was driven by consumption.
We have seen that consumer staples as well as discretionary, non-discretionary all were doing very well. We have seen that FMCG stocks and automobile stocks did extremely well, but the trend in consumer durables as well as automobile is not very healthy.
We have seen that in last few months the percentage growth has fallen significantly. Industrial cycle remains below par. If you look at capital goods companies, infrastructure, there are so many of them in Pune, none of them have given any glimmer of hope that things will recover in FY14. All of them are looking forward to elections and something dramatic that may happen at that level and only then one can look forward to some recovery there.
If you look at entire market then capital goods, infrastructure has still a long way to go and even in FMCG and consumer durables the slowdown signs are already there. Industrial cycle remains below par. In infra development the gross capital formation has fallen. The way the trend is this year, probably numbers will be still lower. This kind of market where sentiment is very negative, midcap is completely hammered and at valuation multiples which are very, very low, has happened earlier as well.
It happened in 1993 after Harshad Mehta crisis, it happened again in 1996-97 when the economy was not doing too well and then there was a brief IT boom. After Ketan Parekh scam again it happened in 2001. Then from 2003-2008 we had a very good bull market and then 2009-2012, there was some recovery.
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People who invested in times like these and had patience for three to five years, can hit multibaggers. So whenever midcaps and small caps recover, they can give you very good returns, but equity as an asset class cannot have certainty if you just look at three months, six months or one year scenario. Also FIIs, when money comes with the positive macro environment and a growing GDP and when the large cap stocks get saturated in terms of FII holdings they follow midcap and then domestic investors also come in.
All of you must be having some interest in stock market, you may or may not be invested much in stock market now, but the fact that you have taken time off on Saturday morning you would have invested historically sometime. So, if you have money that can wait for three to five years then you may start building a portfolio now. The valuations like this are mouth-watering for an analyst and you may not always get them.
In terms of positive side, our inflation is falling. Whether RBI will oblige on Monday by rate cut or not is a matter of debate, but if not this time then next time for sure. The commodity prices, crude oil prices, gold prices globally seem to have peaked out. There maybe corrective aberrations but they do not seem to be going up now. The interest rate cut has not been transmitted to the borrowers primarily because of the liquidity factor which remains tight.
In last few weeks we have seen that a number of FIIs have redeemed their debt holdings as the US treasury yield moved up. As Udayan said, liquidity drying up is a good thing, because sooner or later that was bound to happen. We cannot be dependent on global liquidity remaining benign forever.
Japan has not made any statement and in the US also there is no official statement that they are going to pull out the liquidity, but even just some indications, rumours or some hearsays have caused this kind of volatility. That just indicates how volatile markets can be depending on what happens on FII and the flow of liquidity globally.
Commodity upcycle might have ended and there is a good news for India. India is a net importer of commodities. Higher prices result in inflation, higher cost and lower margin. China has been a big consumer and importer of commodities globally and we are seeing there is a slowdown there like coal consumption also was negative and the Chinese economy is also slowing down. So, China’s appetite for commodity will slow down and globally we can see correction in commodity prices and that augurs well for India.
Election is there. Somebody said, most of the election years have been positive for the market. However, after elections number of uncertainties will go away and we hope that there is some positive outcome after that. The other requirement for bull market that valuations shall be attractive, is already there.
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The Nifty P/E currently is in historical band but this just tells you a part of the story because in midcap and smallcap valuations are very low and they are much lower than the historical averages. Corporate earnings particularly the March quarter was disappointing in terms of IIFL universe, 45 percent of them were below expectations and 25 percent were in line with expectations. So, most of the analysts have revised FY14 estimates downwards and index which was expected to grow at around 13.7, now the revised estimate is 10.6, which is not a great thing from a market point of view. But as we know that sentiment and things can change very radically and quickly.
In last three months, despite negative returns, the Nifty has outperformed other emerging markets and because of the global factors we have seen that Brazil and Russia are affected a lot more compared to India.
From investment point of view, our typical HNI portfolio at this point in time is only about 20 percent of assets that are in equities, 70 percent are in fixed assets. There has been interest rate rise in last few days but if you look at next one year, then good money can be made in debt and government securities of the longer tenure. This is because when the yields contract, you have some capital gain besides safety on interest income.
However, no matter how much we try and predict and whatever be the level of expertise of anybody, nobody can be very sure about future and that is why asset allocation plays a key role in returns. There have been a number of research and studies on this. This is not intuitive because number of customers and investors come and say if equities look good, why not invest entirely in the equities. I can take risk, but it does not happen because they may look good, everything is all positive today, what can happen tomorrow, nobody can predict and vise versa also because sometimes people are very gloomy and markets have given very good returns.
So, the rate of equity today is not significant but it has to be there, you have to be there, keep part of your assets in equities, don’t be out of it completely and be ready to increase it as and when you have some positive signs on that front.
Also, a lot of money has gone into real estate sector and gold. If you look at the Pune real estate prices, then in last six years, they have more than doubled. From these levels, the return on these two asset classes, real estate and gold, will not be as it was historically and maybe will be below average or will find it difficult to beat even the fixed income instruments. That is why if you look at our portfolio, we have reviewed our weightage in gold and real estate significantly.
Even gold prices had a long bull run. Now it looks like the best is behind us and gold prices would correct. They may not fall, they may not crash but still the financial asset return that people have expected from gold is unlikely to happen. 30-50 years back, gold averaged 3-4 percent per anum which is much lower than interest, it was only in last five years that it tried to catch up and there was an aberration.
However, the way things stand today, it looks like gold and real estate are no longer attractive asset classes. In fact, if you can take some risk, some prudence then it is time to start looking at financial assets and also equities. Therefore, we do not have any sell recommendation but still as a house we do not recommend infrastructure, real estate, we advice to stay away from them and even real estate for that matter. So our recommendation in terms of stocks is Mahindra and Mahindra (M&M) which is a play on monsoon, monsoon has started well, it is a very well managed company.
If you look at Axis Bank and ICICI Bank, these are two private sector banks, although private sector banks seem to have risen much faster than public sector undertaking (PSU) banks. Even if you look at P/E multiple or the book value multiple and as a factor of public sector to private sector ratio, it has not changed much in last 15 years despite private sector banks giving very good returns consistently. ITC is a stock which is very resilient to all the cycles. Even excise hike in cigarettes has not impacted its earnings much. So it is a core portfolio holding and HCL Technologies is a play on rupee’s depreciation. If you look at these five stocks, they are long-term core portfolios, you don’t have to be worry about the volatility and day-to-day changes in the market and you can hold them through the cycles.