Prashant Khemka, Co-CEO & CIO- Active Equity at Goldman Sachs AMC has a constructive view on the Indian market at this point in time.
Prashant Khemka, Co-CEO & CIO- Active Equity at Goldman Sachs AMC has a constructive view on the Indian market at this point in time. He says the Reserve Bank of India easing will be a tailwind for market next year. He says the government's recent actions aiding investment sentiment. The market performance will depend on how macro unfolds," he told CNBC-TV18 in an interview.
Khemka feels corporate earnings will bounce back once macros improve. The market, he says, will also keep a keen eye on the political developments in the country.
Below is the edited transcript of Khemka's interview with CNBC-TV18.
Q: How is the dais loaded for India now? Because since September it has been pretty interesting the kind of news flow that has come in. Are you bullish or skeptical?
A: We are constructive about the Indian market at this point in time. If you look back over the last two years, there are three factors that have most prominently impacted the Indian markets; the inflationary environment and related policy actions, the ongoing European turmoil and the lack of an enabling policy environment.
What you have seen over the last two months or even from a longer-term perspective over the last two years, these three factors have varied in terms of degree of importance. So, inflation was a primary concern, sometimes a policy action was the primary concern, but at this point in time and over the last two months if you see- inflation and related policy action seems to become more and more of a rare view mirrored problem.
People are disappointed that policy action or reduction in rates was not announced yesterday, but they are still expecting it in the near-term. It is not the worry that inflation and interest rates might spike up from here. So, the next action is going to be tailwind rather than headwind which was the case for most of the last two years. European turmoil, where the markets are today, both the bond markets and equity markets in Europe seems to suggest that the risk of a downside event is minimal at this point in time. The market seems to be suggesting that some event like the Lehman Brothers is not around the corner or on the horizon.
The spate of actions, announcements and developments on the political front, over the last couple of months, have been very conducive to improving corporate sentiment which has nose dived over the last 12 to 24 months. So when we look at these three factors in combination, which had been weighing down on the market, as a consequence of which we are sitting today lower than where we were at the end of 2000, the combination of these three factors is most favourable at this point in time than it was over the last two years.
We have quite a constructive (view on market). A lot depends on how the macro unfolds over time. At this point in time, with fundamentals where they are and the multiples on the market at about 14 times, which at a discount to longer-term averages, (we are) sitting at the tail-end of five years of sub-trend earnings growth. Corporate earnings have only grown at high single digit compared to longer term trend of 15 percent. So, there is a lot of latent or suppressed earnings power. If the macro environment were to continue to become more enabling, we can see corporate earnings bounce back from decade low level earnings profitability; margin levels as well as suppressed top-line. Corporate earnings can bounce back and with multiple, which is below average I think it is very reasonable to be constructive on the market at this point in time.
Q: Do you see a good multi-year uptrend from hereon unfolding? Has the process of that already begun already or is that too early to make that call?
A: It is too early to make that call. We’ll only know with the benefit of hindsight whether it is multi-year or short live, because there are a few very important macro events still to unfold over the next 12- 18 months, especially on the political front. So the developments on that front would be key to watch out for, in terms of how long it takes to unfold.
Whether it is a beginning already or the beginning at some point down the line, I believe that we are closer to that beginning of a rally today, than we have been at any point over the last five years.
Q: What is the global sentiment like from people that you speak to in your peer set towards India. We have got USD 18 billion and not a great macro environment into India this year. Do you see a lot more of that next year?
A: A lot will depend on how the macro continues to unfold. The global sentiment is far better than it was even a few months ago towards India. A lot of the negative developments did eventually make into the general media abroad as well earlier this year. Particularly some of the tax proposals were very negatively taken. Since then, over the last couple of months, those issues having being largely addressed have improved the global sentiment to a great extent towards India. It is nowhere near a positive or a euphoric kind of sentiment, but it is much better than what it was at the bottom.
Q: How are you positioned in India right now? Are you still playing the high quality defensive card till you have better clarity? Or have you started just moving higher on the risk ladder in your Indian selections?
A: We are in the midst of an new fund offering (NFO). So, we won’t be able to talk too much about the portfolio positioning. We close the NFO today. But globally, we have been investing in the Indian market. Goldman Sachs Asset Management (GSAM) has several global portfolios which are invested in India. And throughout the cycle, we tend to manage a very balanced portfolio.
In our view, there is money to be made in every sector, money to be made in low risk stocks and high risk stocks as well. Our philosophy is very bottoms up driven; stock by stock, stock selection driven, rather than a top down macro led investment strategy with a lot of turnover, depending on where the macro is heading.
We focus on picking stocks which would deliver outsized returns through the cycle and through that maintain a balanced portfolio through the cycle. So, as such there has been no major change or shift in the India component or the Indian portfolios, global Indian portfolios for Goldman Sachs.
Q: Since you are in the process of finalizing or ending an NFO, what sense do you get from the retail HNI fraternity out here? They don’t seem to have been too excited despite the policy moves of the last couple of months. Is their participation still quite wanting?
A: Certainly. As you know, we are in the fifth year, post the peak, where the market is still sitting below the peak at the beginning of 2008. In that sense, the environment or the attitude of the investor, be it retail, HNI or institution, it is no different than what I can recollect over the prior cycles in the fifth year post the peaks. So, I have seen four bull markets- 1985, 1992, 2000 and 2007. The environment and the attitude of the investors today feels very, very similar to what it would have been five years after any of those prior peaks.
So, it is going to improve with the market, it is going to deteriorate with the market. People tend to focus way too much on trailing three year and trailing five year numbers. Sitting today, the trailing three year and five year don’t look fantastic, particularly compared to many other asset classes. So, the equity allocations are towards the low end of these cycles.
As the markets always, bull markets follow bear markets and bear markets follow bull markets. So, as the market exceeds its prior high and moves higher from there, I think the positive environment would be created. It will find more and more comfort from individuals or institutions in raising their allocations to equity asset class. So that is a cycle which has been time tested not only in India, but across the world and it is very unreasonable to expect anything different.
Q: But can you say with confidence that the market found a floor? It may not be off to the races yet, but do you think the market has bottomed out in June or December last year?
A: I think that would be standing today, as things stand that would be very fair assessment. I would completely agree with that, obviously a lot depends on how the macro unfolds over the coming months and quarters but as things stand today that’s a very fair assessment.