Low Budget expectation good; stay away from high risk shrs: HSBC

A: In India there is always been a pre-Budget rally and as you mentioned there has not been much of it this year. I think it is better to not have too high expectations and then get disappointed. I am quite happy to see the low expectations, in fact the direction in terms of how the market will go after the Budget, largely depends on how the market takes it.

You have to remember that perception is more keener than reality, so in a sense that if the market perceives that the government has done its effort, been very prudent about the fiscal deficit, has allocated investments of a capital nature and not of a revenue nature, I think all of these things will determine whether the market takes it positively.

If I think the market senses that probably the worst is over or behind us then we could expect a pretty significant change from how things are at moment.

Sonia: Don’t you think it is more a global cues that the market is focused on now because once again Asian markets have started to fall and we have moved in that trajectory? Budget or no Budget don’t you think that global volatility will keep the market upside capped?

A: That’s hitting the nail on the head. Ever since the start of the year whether it was China or rest the of the emerging markets and eventually also the developed markets because if you see Europe also has more or less fallen in line with what the Indian market has over this period. It is clearly the external which is driving the market today.

In addition to that also the fact that a lot of foreign institutional investors (FIIs) especially the emerging markets focused exchange traded funds (ETFs) have seen significant redemptions in their own domestic funds and as a result of which Indian being an allocative country of that fund, we have seen a significant outflow of FIIs also. So a combination of external news, events and on the ground FII exists to certain has caused the havoc that they have in the Indian markets.

As you mentioned even if the Budget is great but if you get a strong external negative signal that rally is likely to be a little short-lived.

Reema: On the subject of banks do you think that the Budget can provide more than Rs 30,000-35,000 crore of recapitalisation that the market is expecting? Do you think that could go ahead and announce the increase in the foreign direct investment (FDI) cap to 49 percent; give us more details about the bad banks? Anything in the Budget which will make you buy the banking stocks especially the public sector undertaking (PSU) banks?

A: The Budget largely is a forward looking statement. It is a statement of what is likely to be our revenue and our expenditure. In that sense all of these statements can just be by way of an announcement or really just kind of confidence building measures. There is really nothing in the Budget which will be passed in a sense of what we are talking about unless there is a change in the law that requires these changes in ownership to happen.

However, given the kind of information that we have so far, that might be something a little too optimistic to expect, but I am sure that the government is going to make enough noises to ensure that the market remains cognisant of the fact that there is adequate resources at the government level to ensure that the recapitalisation happens.

In the past they have talked about recapitalisation only in banks which need recapitalisation and they have been prudent about how they run their book. So, all of these things will come to a head. I think capital will be available for deserving banks and that is no reason for everybody to get spooked about whether the government will have enough money or not.

I think the government clearly thinks that the safety of the banking system is paramount and they will make sure that there is enough in the Budget to kind of allay the fears that the market may have at this time._PAGEBREAK_

Sonia: One fears that the 52 week lows of 6,900 that we hit earlier this month could be revisited if the government does not walk that tight rope well on one hand and on the other hand if the global cues continue to disappoint. Do you think that we could revisit those lows in couple of months?

A: That is a crystal ball gazing which is best left to experts such as you. However, in my view the market even if it does come off a little bit is again no reason to kind of say that is where it will always stay forever. Markets are always volatile and volatility is something that we must use to our advantages investors and it is not something to get worried about.

While people do look at an absolute level at any one day or the direction to kind of worry about it but over the long run it is very important to remember that markets are slave to earnings and we do believe that the earnings are at low over the last two years given where we are economic cycle is.

In the next few years we expect a turn around as all cycles go and in that sense there is much more to expect for how the market will do from here on rather than worry about which level it will come down to.

Reema: As a portfolio manager, have you increased your cash deployment or have you raised your cash holding because you are trying to conserve capital in such tumultuous times because as we speak, the market is  slipping very fast, we are down over 1 percent. What would your advice be now?

A: From a portfolio management perspective, when we run equity funds, we clearly understand that cash is not what the investor wants us to keep. Cash is for the investor to keep himself if he doesn’t want to allocate to equity, but if he is allocated to equity then we must ensure that we probably package the product in such a way that he gets full exposure to equity.

I will also mention the fact that when you have significant amounts of cash and if the market moves the other way, the cash actually becomes a stone around your neck and that is the reason for significant underperformance as we have seen sometimes in the past. So, we don’t see cash as anyway defensive. We think that that is an allocation and that allocation is at best minimum in all equity portfolios.

So, if you were to say what you do in the face of volatility, I think we reduce the overall standard deviation or the risk in the portfolio by moving to stocks which have lesser volatility potential and that is the way we actually control the risk. If you see over the long period of time, if you have a lower beta of a portfolio then that tends to outperform the broader market over long periods of time and that is what we are concentrating on at the moment.

Sonia: I wanted your thoughts primarily on the PSU banks because many of these banks like State Bank of India (SBI) and even Bank of Baroda (BoB) for that matter are still expensive at a price to book level post disclosing their non-performing assets (NPA) level as well. So, SBI, for example is trading at more than 1 time, Bank of Baroda is trading at 1.5 times. Do you expect more derating in some of these PSU banks?

A: That is an interesting question you have asked and I will answer it from a banking sector perspective because I will not have any comment to make on any specific bank. If you look at the problem that most of the banking industry is facing today it is not that of any one bank being very profligate and lending to some shady promoter. It is a systemic issue because we are talking about a very large swath of the sector being exposed to common assets. In that sense we always feel that there is safety in the herd. So, eventually when there is going to be some sort of reorganisation in these assets and whether the banks get paid back in some form or fashion, it is going to be a sector thing.

In that sense there is some safety there. So, while adjusted book is what you are talking about is where it is reasonably valued or probably in some case a little more expensive than what would you give, for a bank like that.

I would also remind you that it is not as if the adjusted book is going to be written off. There is some obvious potential for some of those assets also to be recovered. In a sense I would think that where the market is today is where the market perceives it to be at fair value.

Depending on the experience from here on whether you do recover most of these bad assets is where the call whether you buy at this price will make you money or not. If you take the worst case scenario and what you are saying right that probably they still are not really at a point where they become very attractive. We have been saying all this while that adjusted book is where one should look at rather than just look at a pure book value because a lot of people were arguing that these companies are cheap given their book size.

However, now that things are getting clearer, people are now getting a sense of what the actual clean book is likely to be and what the marketcap is vis-à-vis that. I would think, just to make a very quick statement after all what I said, I think the market will find its own levels in terms of how it values these banks in sometime.