Urgent need to turn investment cycle around: Religare MF

Vetri Subramaniam, CIO, Religare Mutual Fund, says that the government needs to fill the vacuum of decision making which is created after October to put the economy on a growth trajectory. He however has muted expectations from the winter session of the Parliament.

Also Read: Negative on market, Nifty may see 5450: Siddharth Bhamre Below is the edited transcript of his interview to CNBC-TV18. Q: What is your feeling about the tail end of the year? Do you think the market still has a chance to touch 6,000 and beyond or will it be a grind phase?
A: I think there have been phases where the markets being more trended and other phases where it has not done much. I expect the same fashion to persist going ahead. The global scenario still looks fairly mixed and gloomy. In India there was pick up in the sentiments in the month of September and October due to some sign of decision making but now there is a vacuum in the process. I think more needs to be done in terms of implementation to get the economy moving again or starting to put it back on a high growth trajectory. At this point of time the themes or bases for the market to do a significant move, is quite limited. We continue to see a lot of stocks move around and it's more important now to focus on those stock opportunities rather than look for any significant trend in the near-term. Q: What is the realistic expectation from the winter session of the Parliament this time around?
A: We are keeping our expectations fairly muted. Politics has been a little bit of a mess not just in India but across the globe. The markets across the world have to deal with the fact that now political logjams are dominating economic decision making and not vice versa.
The government needs to do more in terms of legislative reforms but at the same time, there is a lot that can be done which falls outside the purview of the legislature, which is in the realm of administrative reforms, just quicker decision making, which is aimed at clearing the backlog of stalled investments across the country at this point of time. Q: Post spectrum auction failure what are you expecting to see in terms of a fiscal consolidation roadmap from the government itself, do you think the government will be able to deliver to meet that fiscal deficit target?
A: It is very hard to see how the government can deliver that number. Practically, it is clear that revenues are sluggish, the non-revenue sources of income such as auctions, and disinvestments etc are not taking off. There may be some slippage in target and the market is working on the expectation that there will be some slippage.
We hope that this government will take some decisions to get the investment cycle moving again, we are far more muted in our expectations of them being able to curtail the fiscal deficit given the kind of political events that are likely to take place in the country over the next year to year and a half leading up to a general election. History indicates that the governments have not been particularly disciplined as far as the fiscal deficit is concerned, in the run up to a general election. So, I am not willing to bet against that at this point of time. Q: What is the approach at this point that it's going to remain in a bit of a grind with the occasional trading rallies because a lot of people fell left out after what happened in September and the fact that they didn't participate. Do you think they are going to get that opportunity again?
A: It depends on ones focus. If you are looking about 5-10 percent moves then yes, you could justifiably feel left out but the reality is that the market is exactly where it was at some point of time last year, it traded at the same level in 2008 and 2009 and 2010-2011-2012. So, we have made no progress as a market. If you are a trader and focused on short-term moves then it's a completely different story but as an investor the market has not made much progress and I do not think one should get too carried away by the sharp rallies or sharp falls.
From a valuation standpoint where we place our greatest emphasis the market is trading slightly cheaper than average in terms of valuations. It is not as attractive as it was may be in December 2011 or may be even May or June 2012 but neither is it as expensive as it was even in late 2010.
So, there is a fair degree of valuation comfort and I think the only approach that will work in the current circumstances is for investors to gradually invest in this market, not so much on hopes that there is going to be a dramatic turnaround in the near term but just that if you manage to get into the market and in companies more importantly at the right valuations as and when growth comes back there will be significant opportunities for capital appreciation. So, I do not think there is any substitute for being patient at this point in time. Q: You do not subscribe to the view that next year might see the heralding of some kind of a bull market start; do you think its going to be much more same?
A: We are happy with the way our portfolios are placed. We have not taken a huge bet on a macro revival neither we are betting on macro slipping back dramatically. So if things work out well and the markets do well we are happy with the way our portfolios are positioned, to be able to benefit from it because we have always invested on the bases in recent times and we want to be in those companies that are up and running and will be able to benefit from any macro upturn.
We do not have the visibility to believe that there will be a macro upturn in the next six months or 12 months or two years, and even when we talk to a lot of the companies they talk about cost cutting, language of delivering, restructuring their businesses.
So it's difficult to see how one can get the economy running back onto a high growth trajectory in the near term. It is not necessary that market performance is completely correlated with what happens on the macro or a revival in growth trajectory. So therefore, from a fund management perspective we are quite happy, betting on companies which will benefit from growth. We do not have to overpay for the valuations, that's the good part but we are not aggressive in terms of saying that this is going to be a macro turnaround and I do not think that's a call we need to take at this point of time. Q: Which of the catalyst do you think are going to be the most important determinant for the market? Will it be politics as we were discussing, does it comes down to global cues or is there still a belief that it’s going to be the RBI that is going to do the heavy lifting and the pushing for the next year for the market?
A: It will be a mix of all the factors. Investment cycle will be the centre of the turnaround in the economy because we need to figure out a way to get the investment cycle moving again. It is not just a driver of growth, it also created the productive capacity that we need to ensure that we can grow at high rates without inflation raising its head otherwise we will always be in the sort of very short burst of growth followed by sharp slowdown. Investment cycle is the key to have a sustainable economic trajectory and market performance then correlated with that.
We need to be patient for this process to play out and a lot needs to be done on the policy, administration and decision making front equally we have got to give the system sometime time to recover. I think the most encouraging thing that we have seen over the last year is the fact that now companies are having to focus on deleveraging their balance sheets, they are starting to take the hard decisions in terms of disposing assets, trying to restructure their balance sheets but that's not the easiest environment in which to get the investment cycle moving again.
Most of the companies which were at the forefront of the investment cycle boom during the 2003-2008 period, all have fairly damaged balance sheet at this point of time and are all looking to de lever, so that is a challenge in terms of getting the investment cycle moving again and if you move to the banks, a large number of them are bleeding with significant problem on non-performing assets. So who is going to fund the investment cycle is equally a challenge. There is no point looking for the short-term triggers.
These are fairly challenging issues, it will require patience and time to address some of them and some will get addressed only as entrepreneurs take the decisions to clean-up their balance sheets and move on and this is where we are looking for opportunities to invest which are those companies which are well placed to benefit from an upturn in the economic cycle, which are the companies which are doing the right things to clean-up their balance sheets and we think there can be unlocking of value if they do that.
So those are the opportunities to focus on at this point of time and not to get caught up in this argument about the macro and whether we are bottoming, improving, whether the global economy is going to do better or not. I am just willing to back the Indian entrepreneur at this point of time to do a good job. I am not so certain about the global environment and I am certainly not betting on a big boost of reforms or decision making coming from the government but if we back the right entrepreneurs I think eventually over time there will be money to be made from these valuations . Q: As the RBI embarks on an easing of the rate cycle in 2013, would it make sense to back the banking sector now or do you think it’s tough to paint the entire sector with the same brush and you will have to pick stocks within the private sector space itself despite heavy or high valuations?
A: I think there is unnecessary focus on whether RBI is going to cut the repo rate or not, the fact is given the 150 bps CRR cut that they have already done over the course of this year. CRR is at the lowest level in the last decade; in fact it's the lowest level in almost 30 years. RBI have already pumped in liquidity into the market and you can see that in the market place where a lot of the market interest rates have gone down whether it is CDs, commercial paper, they have actually drifted lower over the course of this year also driven partly by the fact that credit demand has been very soft. So there is already a lowering of rates in the market irrespective of RBI action.
There will be some RBI action next year but the trajectory for longer term rates will be determined more by the fact that demand for credit is weak and therefore I do think rates will drift down. This will give the banks some opportunity to start to clean up their balance sheets but many of them continue to face significant headwinds on their asset quality issues and there is a lot infrastructure exposure as well which will go into the non-performing category or will have to at least be restructured to bring those companies back into some financial help from which they can hope to recover.
So some of that pain is still there and you will have to be a little bit stock specific and there are lots of other businesses as well which will benefit from lower interest rates. One don't need to limit stock picking to banks on the basis of reduction in interest rates. There are a lot of other companies and sectors that will benefit. It is better to take a holistic view than rather just focus only on the banks. Q: On the point you made about starting to pick stocks, how do you do that in the sense do you still go with the premium valuations for the trusted performance or are you beginning to look at new spaces because we have seen a lot of new sectors performing, there is media, spirits, beverages?
A: One of the challenges that we are also experiencing at this point of time is the fact that it is a bit of a twin track market and therefore anything that is seen as being very safe and secure and non cyclical in nature is trading at the premium and valuations related to their own historical past. And things which are more cyclical in nature have been trashed down to the lower end of the valuation ranges related to their own past.
So the way we are looking at this is that you need to therefore not get tied into one or the other themes, neither is this a moment to lock yourself into high priced companies where you can then regret at leisure over the next 3-5 years because the high valuations that you are paying for them today means that you will not benefit too much even if their earnings do well.
Neither one wants to get over exposed into companies where valuations have been trashed, nor they don't have balance sheets, they don’t have strong business fundamentals and will not be able to participate in the next macro upturn. But the key over there therefore is really to balance out the portfolio, make sure that you have got exposure to both parts of the market to really all parts of the market in that sense and try to get the best mix that you can of valuations and growth prospects.
We are not too focused on near term earnings growth because we believe that the macro environment is still challenging, we don’t think there is a significant turnaround in the macro environment that is coming immediately. So when we are look at a lot of cyclical businesses we are not really factoring in a significant macro upturn or earnings upturn. But we are looking for is whether these valuations are already indicating a lack of forward earnings growth. And if that is the case then we think that valuations still make a very compelling case for us to look at these businesses.
The trick at this point is to try and balance out the portfolio a bit like a balanced diet. You need to have a little bit of everything in your portfolio at this point of time. There will be a time sometime down the road again where macro or theme will start to dominate again and at that time you can take that call. But at this time I really think it is all about having a healthy balance.

Q: What do you like in Phase II because a lot of people have made the premise that this is the early makings of a bull market, which you do not seem to agree with and the second would you do this differently in terms of what you invest in for next year between fixed income, other asset classes and equity, do you increase or decrease exposure anywhere?
A: If I were to go and look at this issue simply based on valuations then I think there is a case that equity valuations are very much in the comfort zone and while its hard to predict what might happen over the course of the next 6-12 months, history indicates that if you invested in the market at these valuations and been patient over three-five year period, there is typically been money to be made.
So I think the case for equity is reasonably compelling relative to other asset classes which I believe have done well over recent years which is essentially gold and real estate. As far as fixed income is concerned, we do believe that there will be some cycling down of rates over the course of next year as the demand for credit stays weak. So there could be a little bit of money to be made by riding the yield curve down over there as well. I would focus on equities if I had three-five year perspective and one needs to work with that sort of perspective at this point of time and to my mind it’s still very premature to start to call a bottom to the economy at this point in time and I see a lot dichotomy between when we talk to companies and what they are coming out and saying some times in public.
When we talk to companies they are talk more in terms of language of deleveraging, cost cutting, running a tight shift and then when they talk in public they say the economy is recovering, we are enthused by recent government action but that's not translating into their action as yet. I am still a bit wary on that front. Q: If one wanted to take investment rationale depending on the corporate earnings performance that we have seen so far what are the strengths that you have identified where it would make sense to incrementally plough more money?
A: Last quarters earnings numbers per se ended up doing a little bit better than anticipated. Declining growth trajectory in terms of the change in growth is a cause of worry.
But as far as earning are concerned, and given the recent trajectory perhaps a lot of the slowdown in earnings is already reflected in the consensus forecast at this point of time. So we are not too worried about earnings trajectory and what we are also seeing is that some other companies are finding levers to manage their profitability fairly well during a challenging macro environment. So bottom up, we are still finding companies that we think can deliver mid teens kind of earnings growth next year as well. But it is a very mixed picture so even within a specific sector there are one set of companies which could perhaps deliver mid teen earnings growth and in the same sector there are companies headed for a fairly sharp decline in earnings or may be flat earnings next year as well. So the sector driven, macro driven themes are really not visible at this point of time.