If one is disciplined in this process, the ability to take advantage of these opportunities and create wealth becomes better in the long run.
Our approach is to construct a portfolio driven by the time-tested BMV (Business, Management, and Valuation) philosophy and this has helped deliver good, sustainable returns in the long run and we would stick to that than placing our focus on just a handful of names, Anand Shah, Deputy CEO & Head of Investments, BNP Paribas Mutual Fund India, said in an interview with Moneycontrol. Edited excerpts:
Many stocks corrected in double digits and are available at attractive valuations. Do you think that money can be made in the long run if someone invests in quality stocks?
Money can be made in the long run if one owns/invests in quality businesses and at reasonable valuations (read – at fair value or below) through various cycles.
There will, of course, be periods of exuberance (greed) and periods of extreme risk aversion (fear) interspersed in between when stocks tend to get mispriced on either side.
If one keeps their wits about themselves and is disciplined in this process, the ability to take advantage of these opportunities and create wealth becomes better in the long run.
In this process, one is bound to make some mistakes, but it is the ability to learn from the mistakes and evolve the investment process so as to not repeat this the next time that holds the key.
While all this sounds simple enough, it sometimes is the toughest to follow and in that sense - the key words here are ‘evolve investment process’, ‘discipline’, and ‘long run’. There is a very little substitute to this.
Having said that, we believe that while volatility will prevail till general elections, but we are quite sanguine about the earnings growth.
On the back of government spending, rural recovery and urban discretionary spending picking up, we believe there will be ample opportunities to buy good businesses which will deliver excellent earnings growth over next few years.
Thus we believe, there will be ample opportunities to do the bottom-up stock picking and create wealth over the next few years.
What should be the criteria of selecting quality stocks at current levels?
At our end, we follow this time-tested BMV philosophy (Business, Management, and Valuation).
We try to focus on owning Businesses (not just stocks) that can grow faster than the industry & economy, the Managements that can navigate various phases of business cycles better than competition & have best governance practices, and lastly, the Valuations within which the focus is more on cashflow generation.
We always follow this in that order i.e, B followed by M and last is the V. Never the reverse. This has stood us in good stead in the long run. In the end earnings growth (backed by cashflows) will matter for stock price performance and thus one’s attitude should be of buying companies with superior and sustainable earnings growth rate. THE STOCK PRICE WILL FOLLOW EARNINGS !!
What is you call on the currency for the next six months?
Currently, the move in INR is alongside most emerging market currencies compared to the USD and is not an isolated one. While some near-term worries surrounding the oil and commodity prices driven impact on fiscal situation has indeed risen, we find that on a trade-weighted (NEER) basis, the INR is still around 6% higher than the September 2013 levels – in that sense this is more an adjustment vs other currencies and not a sign of panic.
The large Trade and Balance of Payments deficits though do indicate that the pressure may still be on, but we find comfort in the large Forex reserves that the country has, and this does provide the Central Bank enough room to fight any large and unnecessary volatility.
FIIs turned net sellers in the last two months. What is pushing FIIs away from Indian markets?
The FII outflows are a continuation of the above question and the fact that Central Banks across most parts of the world, particularly starting with the US, have started tightening liquidity and this has coincided with the unwinding of the carry trade.
This tightening of USD liquidity does tend to put pressure on Emerging markets. In that sense, India is getting impacted like most other EMs in terms of outflows. Thankfully, we have the domestic investors who have now diverted a greater part of their savings towards financial assets and in that sense are able to take advantage of this liquidity driven move to participate in owning larger pie of high-quality home grown large businesses.
This to some extent reflects the improving institutionalization of the Indian markets and is a healthy sign from a long-term perspective.
Small & midcaps have suffered double-digit fall in 2018. Are they in a bear market?
The large outperformance of the small and midcaps over the last 3-4 years had in some sense taken valuations for some of these at a substantial premium to the Industry leaders at the start of this year.
In that sense, the largecaps had become relatively cheaper – which historically has not lasted for long. In that sense, we have had a mix of this trade narrowing as well as some stress on their own for some of the small and midcap companies - who have had to support increased working capital requirements at a time the cost of capital has gone up.
The lower liquidity (largely inherent in these names) has also led to a higher impact on these stocks. Having said that, this has, for probably the first time in last 4 years, resulted in some high-quality industry leaders within this space is available at reasonable valuations and does provide a good opportunity to start/increasing ownership in them for the long term.
The earnings delivery, cashflows, and capital allocation need to be paramount and watched out as these drive the stock prices in the long run.
What would you advise investors who are holding smallcap and midcap stocks in their portfolio – buy on dips, hold or sellout on rallies?
There is no better teacher than failure and reality. Assess the businesses and managements that you are currently owning and why their stock prices have behaved the way they have. If the businesses are good and high quality and are available at a reasonable margin of safety for the respective investors’ risk appetite and cost of capital, it does provide a good opportunity.
If it does not pass muster in any of these, then the position needs to be reassessed. One good way to avoid the error of timing the bottoms or tops is to average the investment decision – like a SIP.
As far as mutual fund investors in small and midcap funds are concerned, we believe, in the long run, small and midcap funds have delivered good returns to investors, albeit with higher volatility as well. There is economic recovery underway which will continue to help good quality small and midcap companies and thus there is no need to panic and exit.
What will drive Indian markets in the next six months of 2018?
We have historically seen that it is always difficult to predict and time the flows that dictate the market trends. What however has helped keep us in good stead is the focus on understanding the earnings delivery of the various businesses that we own, an ongoing understanding of the managements that run these and the valuations.
In that sense, the earnings delivery needs to be watched out very closely and that is likely to dictate and disperse the winners from the also-ran. At our end, we are currently in the midst of a ‘Macro Negative, Micro Positive’ period and in that sense, the early stages of inflation will tend to help drive corporate earnings and hence a good time to own bottom-up ideas.
Having said that there is no easy answers for equity markets when it comes to next 6 months !!!! 1especially when we have 3 large state elections followed by the general elections, a rising crude price and trade wars looming in the horizon. One should be expecting lots of volatility, either ways !!!
Will RBI raise interest rates again in 2018?
The Indian fixed income market is in a situation where on one hand the economic impulses are showing signs of recovery from De-monetisation and GST, plus global growth data points being better from US and EU. However, the credit flow in India is getting disturbed (evident in credit-deposit ratio being at 74.7%), and hurting money markets as the demand of cash is more than money availability.
The main lenders i.e, PSU banks have gone soft on lending due to most going under the PCA framework. Add to this, and the context of the core inflation moving higher, crude oil being elevated and trade wars looming in the horizon, we expect RBI to hike rates by 50 bps.
The 10 year G Sec may trade in the range of 7.75-8.25% for the most part of the next 12-18 months. However, we expect the yield curve to steepen going forward from flattish to inverted curve currently due to RBI’s support in the banking system by providing liquidity via OMOs.
It is hard to find value in markets because even the quality stocks are falling like anything. Any top stocks you think are value buys after recent decline?
Firstly, we would like to highlight that volatility in equity markets is ‘the nature of the beast’. Markets have seen corrections (which were far higher in magnitude) in the past and have recovered as earnings growth picks up again.
Thus, we would not give too much perturbed by the current market volatility. Over the last 3-5 years, equity mutual funds have delivered on an average 8.7% & 16.5% returns in the largecap category and 11.2% & 25% returns in the midcap category, even after the recent correction.Having said that, our approach is to construct a portfolio driven by the time-tested BMV philosophy and this has helped deliver good, sustainable returns in the long run and we would stick to that than placing our focus on just handful of names.