Shun defensives, go for high dividend cos: Pacific Paradigm

Managing partner of Pacific Paradigm Advisors Punita Kumar Sinha advices investors to stay away from defensives and buy into high-dividend paying companies.

In an interview to CNBc-TV18, Sinha says that the valuations of defensive names have become very stretched, so they are best avoided right now. “Expect companies with high dividends to enjoy a premium,” she said. According to her, the current weakness in the market is because of the lack of liquidity. “Summer months generally have poor liquidity and a lot of investors in a number of countries use this opportunity to take time off and reassess what they want to do in terms of the markets,” she explained, adding that this weakness could continue for a couple more months. She goes on to say that the market is mainly worried about the situation in Greece and how that affects the euro, and also about the growth slowdown in China. “So when the market has such a correction and it’s globally driven, then anything is possible in terms of where the market can go,” he said. Sinha suggests using these corrections to make good returns for people who can think a little bit longer term. Also read: Sukhani picks 12 stocks, says only 3 worth a buy Below is an edited transcript of her interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: It’s been a bad few days, we have been down to 4800 Nifty, how much more pain do you reckon? A: When you have corrections like this, they are quite sharp. We have seen that in previous corrections, whether it was November, whether it was 2008, whether it was the dot com burst. So corrections are very hard to predict, but those are the time that you have to sit down and look at what one should be doing for a slightly longer term horizon. These corrections do often provide opportunities to make good returns for people who can think a little bit longer term. Q: The dollar seems to indicate strong risk off, but we haven’t seen that punctuated by huge outflows yet from the market. Do you think that is going to lead to a second wave of correction or is the market likely to continue to fall like this on a very shallow flow situation? A: At these index levels and where the dollar-rupee is at, I think a lot of investors are not very keen to take money out. As I said previously, over five years in dollar terms investors have made no money in the Indian markets and to pull money out right now would mean that you are pretty much giving up on India. I think in a lot of markets, not just India, liquidity is fairly low right now because nobody knows what to do and when corrections like this happen people just stay on the sideline. Q: The problem is that there is no interest and no buying from any quarter in the market because of the global uncertainty. How much longer do you see people sitting on their hands and not even taking valuation calls and buying selectively? A: May has generally been a bad month for markets and this is something that’s happened over and over again over the last 10-15 years. Summer months generally have poor liquidity and a lot of investors in a number of countries use this opportunity to take time off and reassess what they want to do in terms of the markets. So liquidity tends to remain less in this environment and that may go on for a couple of months. Q: What chance do you see of the market going back and retesting those December lows? After the January and February rally, it has appeared that we will not revisit those levels anytime soon, but we are barely 4-5% away from there. A: It’s possible. As I said, when the market has such a correction and it’s globally driven, and panic selling, then anything is possible in terms of where the market can go. I think people are worried about what is happening with Greece, not because it’s Greece specific but what it means for the euro. At the moment, because there is no visibility as to how this might pan out; it’s creating a lot of panic. _PAGEBREAK_ Q: When you say it’s a good time for long-term buying, what kind of horizon should people work with? We have just been discussing how this bear market has lasted half a decade now. What kind of time horizon would you set here? A: If you look at where valuations are, look at the dividend yields in a number of companies. I am not just talking about India, but Europe and even in a number of Asian countries. The dividend yields are 6-8% and that generally provides good support on valuations. Also look at what the earnings have done this quarter. A number of companies have reported good earnings and there have been a large number of EPS upgrades post the earnings. Again, that’s not specific just to India but across the world including the US and Asian companies. So while the macro situation is looking a little bit uncertain, companies have done quite well. So when you set you price targets, it can be achieved in six months, it can be achieved in two years. Given the volatility in the market, there could be a very sharp rally after this or it may take some time to grind back up. So you just have to set your price targets and be patient. If they reach sooner because of a sharp rally or a rally from an oversold territory, then you might get returns faster than you anticipated. Q: How would you play this in terms of a stance? Do you still think it’s a wise idea to play this via the defensives or are you picking up some of those bombed out sectors? A: I think defensives generally do well in a panic environment. I do not know how long this panic environment will last; I would hope it doesn’t last too long. So I think one should be taking valuation calls and the defensives are not to place where you get a lot of valuation right now. Where the value is more in other areas and that’s what one should be looking at. Also remember that whenever there has been a rally after panic selling, it’s the non-quality, the more bombed out sectors that outperform. Q: The Greek election is only on June 17, that’s a good month away. What do you expect between now and then? Do you expect some statements from the ECB, something to soothe the nerves, or will the market continue to lurch like this? A: Pressure is obviously mounting on Greece. The banks are not getting the liquidity from the ECB that they need and so the pressures are mounting for there to be some kind of a decision. The challenge is that what financial markets like the general population doesn’t like. Financial markets don’t like high fiscal deficits and debt, and the general population globally today obviously doesn’t want austerity. That’s sort of the problem everywhere and in the next four weeks we will probably continue to see large amount of debate around this topic. If Greece by itself breaks from the euro it is not such a big concern for it is just one country. The problem is the contagion effect. We have to look back 20 years when there was no euro, and these economies functioned perfectly fine. So they might continue to function perfectly fine if they even do separate. But the problem is how is it going to be played out in the next several weeks. Q: Given that in dollar terms we have practically given up all the gains made in the first two months, how would you expect foreign investors to behave now? A: I think right now the people who only took investments into India for a very short time as an allocation or a risk-on trade are probably the ones that are getting out. But those who have entered India because they think the valuations are attractive are probably likely to stay put given that they haven’t really made any money now. Year-to-date in dollar terms I think India is flat. Q: We are hearing reports that even long only money is beginning to cut targets on the market and the argument seems to be that it’s not such a great idea to be pushing growth any more. What do you think long only money is up to through the course of the last few months? A: I think how fast the mood has changed in the last several weeks is amazing. Just several weeks ago when I was meeting investors they were still keen to allocate to India because they thought the valuations were looking good. Of course people are concerned about the policy paralysis and the growth slowing down, but the growth is slowing down in China as well. So the call that investors are making globally is the same call that local investors have to make. What local investors are looking at is if they should be in defensive stocks or beaten down stocks and the global investors are looking at the same thing; should they been in defensive markets like Malaysia and Singapore or should they be in markets that are beaten down like India where the valuations are better. So it’s same sort of challenge that the global investors are facing when they think of India. Q: The key expectation when we stepped into this year was that there would be a lot of relief coming from the Reserve Bank. Does that still remain open for the second half? Do you expect to see aggressive cutting or given the global context and the way they have had to firefight with the rupee do you think chances are low that we see too much in terms of rate cuts? A: I do expect that there will be some rate cuts. We are seeing a lot of those measures in China. The Indian economy is slowing down so I think there will have to be some kind of liquidity easing again and that might require rate cuts because the economy otherwise could go into a hard landing. That has to obviously be balanced with the fact that the rupee is weakening. Between the two, I guess it depends on what the Reserve Bank thinks is the tradeoff they want to make. In my view, one should not focus only on the rupee but also look at the growth and the weakening growth should stimulate some kind of a liquidity easing. Globally countries are beginning to live with higher inflation and even the IMF had issued a paper that a 3-5% inflation is probably okay if the growth has to be managed. So I think generally governments are now beginning to live with slightly higher inflation and I think maybe the Reserve Bank would probably also think about that.