Weakness in market a chance to accumulate: Pacific Paradigm

Punita Kumar Sinha, managing, partner, Pacific Paradigm finds that valuations in India are slowly starting to become reasonable even though she sees the Indian market heading lower in the near-term. Due to the difficulty in predicting which way the market will turn, sentiment is also shifting which has investors locking in profits.

Sinha sees this as an ideal opportunity to accumulate while this weakness in equities continues. “You are being paid to take risk and any weakness which may last a couple of months or may not may provide attractive opportunities again for those who want to take on some risk and put money into equity markets.” Below is an edited transcript of her interview. Watch the accompanying videos for more. Q: It’s been quite a bad few sessions for the market. GAAR clarification has come and gone but we have not progressed at all. Do you see more downside here?
A: Right now for the very short-term its looking like that although its very hard to say if this is going to be short-lived or if its going to be something that will last through the whole summer. My view is that the valuations are actually becoming reasonable especially in India and across some other markets as well. If you take a longer-term view, this correction may actually provide potentially some entry points. Q: What do you hear about the global sentiment though? Is that seeing a big contraction in terms of risk?
A: There definitely has been a big shift in sentiment in the last few days. It’s actually the fact that the first quarter has been very good for equity markets and people are locking in their profits as any negative news comes people think - why not just lock in some profits. Also, seasonally we are entering the weak months of summer and people have over the years coined the phrase ‘Sell in May and go away’ and that seems to be what people might be doing but again companies in the US have also reported well for the most part.
Some companies have obviously not reported well and they have been punished for that but valuations generally are attractive globally. If you look at valuations in Europe in particular, the dividend yields in some of the companies are like 6-7%. You don’t really get anything by putting your money in banks because interest rates are so low whether it’s in the US or Europe. So you are being paid to take risk and any weakness which may last a couple of months or may not may provide attractive opportunities again for those who want to take on some risk and put money into equity markets. Q: Looking at the European newsflow, is it likely that for another few weeks global investors might remain on risk off mode because that’s what we are worrying about here with the rupee pushing 53.50?
A: If you go back historically and I was just looking at what happened in 1981 in France when the socialists or the Left parties were in power and came to power and the equity markets dropped about 30% in the first year I think but after that the equity markets rallied very sharply and remained quite buoyant for the next 10 years. So there is a shift in sentiment because nobody knows what the new government will do and how their policies might affect equity markets.
Therefore, there might be a correction which is what we are seeing right now but if they can manage their situation well then there is value. Dividend yields are high and the alternative to invest in equity markets on the other side is not great. So where do you actually park your money? That’s the real question. At some point people might come back to equity markets if they think that the governments are able to manage the situation but if they are not able to manage the situation and things become dicier then we are in a different risk zone.
Also whether it’s Europe, whether it’s US or India there is a big trade-off to be made between whether you want to focus on growth or whether you want to focus on reining in debt and fiscal deficit. That’s really what financial markets and political leaderships are struggling with. Political leaders worldwide are finding it very challenging to manage the expectations of both the financial markets which want growth and lower fiscal deficit and the general population which really doesn’t care so much about fiscal deficit is only focused on growth. Q: The fear at this point is on the depth of the correction. If you asked investors at the start of May they said a 5-7% token cut and that’s about it. Are you getting the sense that we are anywhere near the end of the correction or could this one be much sharper?
A: When corrections begin and people panic and risk off trade takes over, it’s very hard to say how much markets can fall. All I know is that at some level the valuation starts looking attractive and at that point you just have to focus on company specific factors and look at where you think you want to take on some risk. But on a very short-term I really can't say what the markets might do and how much they might fall.
_PAGEBREAK_ Q: At this point is it prudent for investors to take valuation calls or because of the global risks should people just stay away and watch newsflow because of the possibility of a breakdown where valuations become quite meaningless?
A: If you look back over the last five-years, Indian equity markets have actually given no returns in dollar terms and you are actually down 5%. But the midcap companies or midcap index has actually given positive returns over the last five-years but again the returns are nothing to write about and India has underperformed now over one-year, three-years and in some cases even over five-years depending on which markets you compare it to. You can't have an economy as large as India that continues to underperform in its stock market.
So, yes, you probably should be taking some valuation calls but probably given the correction can be very sharp as we have seen when these corrections happen or it may not be sharp. It’s very hard to know because suddenly some positive newsflow comes around and you could have a rally. It may be good to be a little bit more balanced, not get too aggressive about jumping in but also not get too bearish because you also have to focus on the valuations. Q: If you think valuations are appealing, what are you buying in India?
A: As you were summarising that the consumer space which is where the growth is in quality names, those are the ones that are trading at expensive valuations and then the other pack is trading at very attractive valuations but there is no eminent catalyst. So it’s obviously challenging. It’s very stock specific; you can still find good companies at decent valuations.
I know there is concern that interest rates may not come down anytime soon but over the course of the next 12 months, I do think either we are going to have a hard landing if there is no interest rate cut and GDP growth is going to go to 5-6% and then you are in trouble or as the rupee may potentially stabilise down the road, interest rates will be cut and you probably will benefit by investing in companies that are interest rate sensitive but that call is a slightly longer term call than it was earlier. Q: Are you getting any more optimistic on the policy front? GAAR has been pushed back by a year. Yesterday the finance minister actually made some comments about oil and the need to move on that front. Do you expect policy to help?
A: I think clearly the finance ministry is under pressure and understands that they need to do something about policy otherwise India will get downgraded. Foreign investors are pulling out and they are not going to meet their fiscal deficit targets. There are a lot of issues that are going to get impacted if they don’t act. I am hoping that there will be some action taken which will be positive but it’s a challenging environment, inflation cross the globe is a little bit on the high side and political leaderships are facing the debate between whether to focus on growth or fiscal deficit. In India too we are seeing that debate and I think the government is probably going to have to act. Q: How would you split it up now if you had to choose between equities, fixed income and even an asset like gold?
A: If you look globally, fixed income has been the best performing asset class over the last five-years and so the question is what happens in the next several years. The fixed income cannot remain the best performing asset class given where interest rates are globally and also in India where interest rates are the trend has to be that interest rates will come down.
So in India fixed income might still do well but globally fixed income had its rally and therefore the bias has to be towards equities and in India other than – if you look at real estate as an asset class that’s already done so much better then equities. Fixed income has also done better than equities. So you have to put money into equities because the risk reward will shift more in favor of equities but fixed income might also continue to do okay and regarding gold, gold seems to behave pretty much as a risk on risk off trade. Although right now gold is also been falling everything right now is - cash seems to be better than everything else. But that will change. Q: What are you doing with Indian IT? There has been some confusion after the Cognizant guidance. Are you still bullish or overweight on IT or cautious?
A: I have never been that bullish on IT right now because IT is really a play on global growth and so is very company specific. You have to look at whether the companies are benefiting from the US or Europe and if there is business more in the US they are going to do better than the ones that are in Europe. IT though longer-term is good and an important theme for India because as economies come out of recession, global spending will pick up and the IT sector typically benefits in that kind of environment, but it has to be very company specific.