Fund manager roundtable: Does mkt have further room to run?

Risbood: You have always been a strong advocate if growth at reasonable price. On the growth side we are seeing some kind of greenshoots in terms of corporate profitability improving, probably corporate profits this quarter have gone up by may be 10-12 percent. You are also hearing about GDP growth forecast being increased by IMF and the likes. The question really is in terms of reasonable price with the market already run up almost 40 percent since September last year is there reasonable price really available in the market as of now?

Jain: It depends on perspective. You are right that in the last few months markets have done quite well, however if you go back six years when markets were up only 30 percent. In January 2008 Sensex was at 21000, today it is 28000, it is up may be 40 percent. Over this period the nominal GDP growth has been far in excess of this.

I think the most important metrics is the PE multiple. PEs are at about 16 odd times which is quite reasonable in my opinion. I don't think the earnings are being over estimated because corporate profitability in India is at a 17-18 year low. So, I would say things look quite good and decent to me.

Risbood: Like midcaps you have seen have rallied almost 70 percent from the September lows and maybe a few stocks which were looking good might be up even 200-300 percent. So, are you finding value in midcaps or still there are some bottom up stocks available wherein you find value in that space?

Bhaskar: More than the midcap segment, the segment that worries us is now is the smallcap segment because there, there has been almost a bubble like kind of move that has happened. So, if you look at the BSE smallcap index almost 43 percent of the stocks there have given a return of more than 100 percent in the last 12 months.

Almost 10 percent of the stocks of the index have given a return of just more than 400 percent return. If I was to ask out here which were the two best performing stocks from that index I don't know whether anyone would know those companies and those companies are up by figure of 30 times and 20 times. So, that is the segment of market where there has been a lot of speculation. So that worries to some extent.

Today the smallcap index trades at a premium to the Nifty which usually is a good signal for us to be a little cautious on that part of the market. In terms of the midcap the value part of it has got eroded because of the move that is there but there is always expectation that when you are at the turning point of economy and when you are going to see a cusp of higher growth in terms of GDP growth rate and lower inflation and lower interest rate then this segment tends to grow at a much faster than the case of largecaps and that is the kind of hypothesis that everyone today has about that segment.

However, if you see the actual signs of earnings growth are still very moderate. So, it is more of the case that in the past when we have had this kind of scenario then it has been followed by very high growth. So, people are looking at that expectation as such for the segment.

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Risbood: All the earlier bull runs that we saw have been led by one or two sectors. Like 1990 you had cement, late 1990s maybe IT was one sector which we looked at, 2000 you had infrastructure and real estate. Which are the sectors or themes you are looking at which might work this time or is it going to be more like a broad based kind of a rally?

Patil: We are at the bottom of the economic cycle and looking at the stable government at the centre what we have it is high time that if you want to get the GDP growth back to around 7-8 percent kind of a level then in the last three years you have seen investment cycle collapsing. So, the government will also if you look at the Budget which was presented though not much but the thrust would be in terms of getting the manufacturing cycle back, the infrastructure sector back on track.

With GDP growth likely to pick up from around 5 percent to around 7-8 percent in next three or four years domestic cyclical sectors will lead that. If we take a proxy to that banking and financials would be one but the manufacturing and the infrastructure story could again come back strongly. If we expect interest rates to also moderate down, the big story this time would be inflation; whether it can remain at reasonable levels for a sustained period of time.

We have seen the policies of the earlier government especially rural wage inflation was very high, policies of distributor which kept inflation levels at very high levels, I think the way inflation is headed and this time around the global growth is pretty weak, the commodity prices are pretty low then the rate sensitive sectors or stocks those could be the sectors actually which could lead the rally in this up turn.

Risbood: Just one thing which I actually checked with the fixed income guys also in an earlier discussion but how do you see the US interest rates impacting the interest rate cycle in India and will that kind of have a negative impact even on the Indian equity markets as of now?

Patil: US is likely to increase interest rates six months down the line and we are on a cusp where we are looking at interest rate cuts probably three or six months down the line. There is a fear that US increasing interest rates how would that impact because we have already seen dollar strengthening in anticipation to that and money getting withdrawn for some of the risky asset class.

If you look at the differential between US interest rate and Indian interest rate, while they were moving in opposite direction but differential is still pretty large compared to historical average. Also, it is a function of the inflation differential between what is there in US and India. So, you are looking at a regime where India inflation would be significantly lower than what we have seen in the last three or four years.

I think even with interest rates moving in divergence between US and India it can still not lead to a significant distortion and fight of capital which normally one would have expected going forward. A one time you will see risk across global asset classes which could lead to short-term correction but things would normalise pretty soon.

Risbood: You look at a lot of smallcap and midcap stocks and e-commerce is one theme which has been emerging quite strongly in terms of at least private equity moving to that space. We are talking about Filpkart having valuation of close to USD 8-9 billion or so. What are these new sectors or themes that you are witnessing as of now which might be of interest to investors as well advisors?

Singhania: One thing is that India is a great country and India is a very different country. India is a country led by entrepreneurs, driven by entrepreneurs and that makes it all the more interesting from an investor perspective because they have so many different options.

The other thing is at least we believe that India is behind the world by 15-20 years but that is an advantage because what has happened in the other parts of the country is ultimately going to happen in India. Looking at all this we were little early in terms of the building material companies. Two, three years back we felt that once the standard of living rises, once urbanisation happens, more houses are created you will have the tiles and sanitaryware and all those companies do well.

Similar theme which is a little difficult to actually execute from an institutional perspective is home grown brands. The largest textile brand in India for example is only USD 200 million. You can't have 25 percent of the world's youth in the country and some small brand in Europe worth USD 20 billion and in India the brand being worth only USD 200 million. So, that is one small sub theme which we feel is going to be interesting which is the home grown brands and that can be in shoes, textiles, tiles, that can be in some other thing but that is going to be a very strong theme as we move forward.

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Risbood: We saw a lot of stories about decoupling of India in 2006-07 wherein whatever happens to globe India will continue to grow and its economy will do well. We are again getting into that kind of phase right now. Europe is going into deflation, China is kind of slowing down like at 7 percent kind of growth rates. US is talking about increasing rates may be in 2015. Is this kind of a decoupling theory right and will it work for India this time or is it again like something that we saw in 2008 when the entire market crashed when the US economy went through a turmoil?

Singhania: I will begin with a cliché that this time is different. Having said that if you see in 2006-07 what was happening was that all the countries were growing fast. There was unanimity in the sense that everyone believed that this is going to continue. What happened post that was very surprising. This time on the contrary you have been so cautious last 3-4 years despite almost all the - I am talking about global markets now, all the factors slowly turning positive. There has always been some hesitation whether it was a fiscal cliff, QE tapering now those events come and those events go, in fact buying of bonds by the US Fed and despite that the yields are where they are and the markets are where they are. So, this time the investors have been a little bit more cautious.

Coming to India, I think India is actually getting into a phase where it is getting differentiated from the world. So, last 4-5 years whereas the world saw continuous inflation going down and interest rates being reduced, India on the contrary had high inflation rates and almost the highest ever interest rates. What we are seeing now is that there is a possibility that interest rates in the US and other economies will start to inch up.

India on the contrary there is no denying the fact that interest rates are only going to go down. It might happen in December, it might happen after six months, it might happen after one year. The timing might differ from person to person but the direction is very clear. In that sense this time we are actually differentiated kind of an economy. We also have to remember that after 30 years we have got a decisive mandate as far as politics is concerned and that is important because that swing of 1-2 percent in GDP is definitely due to government policies all things being equal. There is a lot of hope on that front. The first 5-6 months have begun well. The expectations as we move forward in the next 3-4 months is very good. There is an expectation of rate cut. There have been some very good ministries being formed. There might be a rating upgrade as far as Moody's is concerned. We have a Budget which is expected to be a differentiated kind of a Budget. So, that also will mean that India would in the sense be a little differentiated from the world.

Risbood: One of the things that is spoken about is obviously global risks. What are the other risks that people should look at in terms of lets say local policy or how do you see what are the kind of things you would like to see from the government in the next one year or two years. So, that the market can move up to the next level from where it is right now?

Patil: Global risks are something which are immediately in the horizon and specially whether it emanates from Europe where we are seeing a slowdown over there or whether it is China. However I think local risks also one needs to be cognizant because lot of rally in the market which has happened in the recent past has been on expectations that you will see reforms coming through especially in sectors like coal, power which are big issues, which are hampering the growth and investment. Lot of money is still stuck in some of these projects and unless some of these issues are resolved, we know issues about coal mines getting deallocated. Now there quickly needs to be a policy in terms of how are we going to allocate these mines back because unless that is done you won't see the risk appetite coming back in terms of promoters committing capital for new capex and new projects and that is really important if the new cycle has to begin. So, some of the decisions on some of these issues in the next 3-6 months is something which the market would like to see positive steps on that.

Risbood: One of the other debates which is going around in the industry and probably Sebi is also talking slightly tough on it is in terms of close-ended funds and many launches of close-ended funds which have happened and have collected good amounts but mainly on account of commissions which have been given out by the industry to many financial advisors. What are your thoughts in terms of managing these funds? Are they really beneficial from a fund managers’ standpoint rather than an investor’s standpoint?

Bhaskar: To me it is a straightforward business decision. There is no gun on anyone's head to sell or to buy those products. You get into them with your eyes open. Don't develop a conscience after you [the financial advisor[ has been to the trip abroad and all the other benefits. If you want to have conscience, have conscience before the trip is announced.

From our point of view what we are doing is that we have a very specific aim in terms of what those schemes would invest in. Therefore for us it is a fairly easy job to do accept that the timing part puts a lot of luck element in terms of your returns because these are fixed period returns. So, the time when you start and the time when you end will actually have a disproportionate level of impact on your overall returns which people don't really realise. I will give you example. I used to work for Kothari Pioneer earlier and we had a closed end scheme called bluechip fund which used to trade at a significant discount and we all thought that the best way to invest our bonuses was to buy it from the market because there was a discount of Rs 4-4.5 on an NAV.

However when the three year period of that scheme came it was also the mid part of the bear market where there was a 40 percent drop in NAV in just 7 months time. So, which is the element that we keep on stressing to our investors is that there is a whole lot of element of timing in these products which can have a big impact on your overall returns. In terms of investment strategy we have been fairly clear in trying to showcase what we will do but in terms of return expectation I have a feeling that investors and distributors do not really appreciate that element of timing when you have launched the product and when you are going to close it because these are all prefixed, there you don't have the flexibility to extend them. So, that part people have to be a bit more careful about.

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Risbood: What does look more attractive right now from a one year perspective, is it equity or debt? Bhaskar: We should look at investing in equities for example as an equivalent of what we do in terms for PF. Most of us are employees of companies where we get PF and it stays with us for the entire working life. I haven’t met too many of my peers who look at their PF balance every six months to see where they are and how much it is. Same way why do we have to look at our equity investment every year or every six months and either get euphoric or get down in the dumps. I think so the time is fairly well set for us to look at a really long period of time which is more than 15 years when you do an SIP and that is what really matters. We have done one study of the BSE Sensex, there is only a 44 percent probability to get positive returns just on a one year basis. That is the track record of BSE on a 25 year period so you can as well toss a coin and get a higher probability. So, first of all the timeframe for equity has to be changed for all of us. So, these questions then become irrelevant so then I can ramble along for a long period of time without answering that question. Risbood: Mahesh your thoughts on this. Patil: Anoop has given an answer for all of us in a way I would say. When your investment horizon for equity can’t be say on a year basis because it might so happen that one year the markets might not give any return or even negative but we see in one year market can give 50 percent even 100 percent return; we have seen in the past. So, it is important to be in the market as long as the long-term outlook is fairly decent and which it looks at this point in time. We are at a phase where as I said earlier beginning of a cycle things will improve, interest rates will go down. Investing in a debt probably in a one year you can play the interest rate cycle but then there is a reinvestment risk which is there. If interest rates go down automatically the valuation outlook for equity would also increase longer term because the cost of equity will go down that will probably justify a higher multiple for the market. So, I think the risk reward looks in favour for equity for investors and one should maintain the right asset allocation. Jain: I think the outlook is positive for both equities and fixed income in my opinion. However, I think there is less merit in investing in equities for one year. So, if investment horizon is only one year then one should prefer fixed income. For equities you should come with 2-5 years views. The risk is less in equities over long periods and it also gives it more time to compound. Singhania: From our perspective we are playing with one major thing in mind which is that between 2014 to 2020 earnings will triple and that is basically what we are playing for. Now, if the market starts to discount that earlier we might make returns in one year, if the market basically discounts it a little back ended then there is a possibility that one year might not lead you anywhere. So, I agree with everyone and you would also agree that when you are looking at investing in equity look at it from creating wealth not from creating income. If you want to create income there are different avenues available for you but if you want to create wealth look at investing in equity. India is a great economy, we are already among the top 10 market cap companies in the world, we will be from two trillion definitely be going to 4-5 trillion in the next 6-8 years depending on how bullish a person is and there is a kind of wealth which will be created eventually. So, have focus, be long-term and you will make money.