For retail investors, it is important to focus on longer term horizons, says Mihir Vora, Director and CIO at Max Life Insurance.
If India goes ahead with aggressive cuts on taxes, GST, interest rates and structural reforms, and if the global situation does turn benign, the market can deliver 15-20% returns, Mihir Vora, Director and CIO at Max Life Insurance, tells Moneycontrol’s Kshitij Anand in an interview.
Q) Do you think investors are caught in this dilemma in the current market environment – ‘What is looking cheap is not safe, and what is safe is not cheap’?
A) The market has been polarised since 2018, with just a few stocks driving the large cap indices like the Nifty and S&P BSE Sensex higher.
There are very few stocks that have given confidence to the investors on the earnings front in the past couple of years, and most of those names witnessed increased investor interest.
On the other hand, earnings growth for the Nifty has been a meager 3 percent annualised over the past 5 years. Pressure on margins and increasing interest costs for manufacturing companies in most sectors (consumer, cyclical, commodities), and non-performing assets in banks have dragged down Nifty profits.
Thus almost 80 percent of the returns from the market is due to the increase in valuations. Liquidity has flowed into few stocks that have shown relatively better earnings growth, thus pushing prices higher, while there has been no improvement in the overall fundamentals of the economy.
Over the long-term, stock prices will mimic earnings growth, and we expect this to hold true this time as well for individual stocks as well as for the market. So, going forward, earnings need to pick up substantially over the next couple of years.
Q) 2019 could well turn out to be the year of long term investment. A year in which many multi-baggers could be born if someone holds them for a long-term period, or maybe less? What are your views?
A) It is possible to find multi-baggers in any situation/market if one works hard enough. Our investment philosophy is to identify businesses with visible earnings growth, good returns on capital and in sectors that have a long runway for growth.
Having said that, given the breakdown in small and mid-caps over the past 18 months, value is emerging in some names even though earnings are depressed and valuations have come down significantly.
So, we could see 2019 as a year of stock-picking with a good probability of hitting some multi-baggers. Our approach to buying growth at a reasonable price should work well in this situation.
Q) How should investors make a case for investment at a time when everything is falling? What are the factors which one can look at for making an informed investment approach? What is your advice to investors at a time when most of them would be thinking of cancelling their SIPs and turning away from equity investment, as portfolio returns are negative?
A) We expect a slow recovery and at the same time looking at high-single-digit returns from these levels on the Nifty over the next one-year period.
In a bull case scenario, if we go ahead with aggressive cuts on taxes, GST, interest rates, structural reforms — and the global situation does turn benign — then the market can deliver 15-20 percent returns.
Corporates are currently not investing more in fresh capex and the majority of cash flows are being utilised for deleveraging.
Looking at the way interest rates and liquidity conditions are being addressed in India, sooner rather than later, we should see local financial stress being resolved — foreign investments will increase because of India’s relative attractiveness.
While it is certain that the economy will accelerate, the timing is uncertain. The best way to avoid the timing uncertainty is to invest over some time through systematic investments at pre-defined intervals.
For retail investors, it is important to ignore the noise in the near term and focus on the longer term time horizons.
Over the last 20 years, we have seen many global and local factors that have impacted the markets in the near term. However, despite all this volatility, the long-term returns have been the highest from equities among all asset classes.
Q) FIIs sentiment has turned bearish for Indian markets. Data suggests that funds are moving towards other EMs where there is no excess tax burden. Do you think the outflows have just started? Will they only pick up pace in the near future?
A) India has under-performed its peers in the emerging markets this year. In July alone, FIIs have sold close to US$3 billion of equity.
Post the decisive election results, there were huge expectations that the new government will announce reforms to help kickstart the economy.
However, sentiment has taken a hit due to global concerns, continuing stress in the domestic financial system, and a lack of big-bang announcements. Further, the increase in taxes and surcharges in the budget impacted sentiment.
With stress in global trade due to trade wars and slowing economic growth, we believe that India will stand out as a good and stable investment destination.
India’s economy, which is more dependent on domestic consumption and favourable demographics, should outperform in the current environment.
Moreover, there are signs that after the strong reaction of FPI investors, the government is willing to look at remedial measures, which can get the sentiment back.
Q) According to you, what could the government do to turn around the sentiment on D-Street?
A) The key issues facing the economy are job creation, infrastructure, rural distress and the issues in some large banks and finance companies.
This requires capital infusion in these financial institutions, investment by the private sector and revival in the real estate sector – we need targeted action by the government and regulators in these segments.
In terms of policy / law-making, reforms in land acquisition laws and labour laws are areas where quick action is required as these are important for job creation as well as investment. Reduction and rationalisation of GST rates too would help.
We need steps to reduce the trade deficit, spur domestic manufacturing as well as focus on labour-intensive industries for exports.
Also, the government should take a relook at the FPI tax surcharge issue as this makes India potentially uncompetitive versus some of the other investment destinations for global investors.
Q) July auto sales numbers are not encouraging. Most of the auto names are trading with double-digit cuts so far in the year 2019 and also below their respective 200-DMA. Do you think this sector could turn out to be the dark horse?
A) The slump in vehicle sales is not temporary anymore and every month’s sales continue to disappoint. Initially, it was attributed to the overall slowdown in the rural and urban economy.
However, the slowdown is deepening as there are reports of dealers not getting funding from banks, as well as NBFCs. The current slowdown could last a quarter.
The festival season (September-October) should see demand recovery and inventory correction. Many of the auto stocks have generated a high return on capital and post normalisation of demand, the sector remains a good investment opportunity – we don’t believe that this segment can remain weak for an extended period given the underlying secular trend of demographics and penetration of financing.
Q) A recent report by World Bank said India has slipped to the 7th slot in the global GDP ranking. Will the government be able to achieve the dream of becoming a $5-trn economy in the next 5 years?
A) GDP is a function of savings, investment, and incremental capital-output ratio. Reaching the $ 5 trillion number in the next 5 years at an envisaged real GDP growth CAGR of 8 percent needs an increase in investment and savings rates.
Consumption has been the driver of growth over the past few years, but this is not a sustainable model.
Thus we need targeted policies to encourage large-scale investments in 1) manufacturing capacity 2) infrastructure and 3) real estate. All the Asian Tiger economies like Indonesia, Malaysia, Thailand and China were able to generate high growth rates for extended periods only when all the three were working together.
It also needs a keen focus on reducing imports and increasing exports. For this, we need to attract foreign capital, lower interest rates and ease land and labour laws.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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