Need RBI easing, capex pick up for upmove: DSP BlackRock

Anup Maheshwari, DSP Blackrock Investment Managers feels that the market is looking for more RBI easing and improvement in capex for further upmove.

He feels that that interest rate cuts will be important catalyst for Indian equities. In an interview to CNBC-TV18, he said, "Clearly, any reduction in interest rates and the fact that results have continued to be fairly modest, we seem to be getting to a point where even margins seem to be bottoming out slowly. It is a slow recovery but from a market stand point, it is a good base that gets formed for better performance going ahead." Also Read: HSBC bearish on India, says Q2 to decide market moves  He is optimistic that there are enough catalysts for international investors to keep India on radar. Maheshwari advises investors to deploy funds in quality companies with a long-term view. He also sees more value in cyclicals at this point. Below is the verbatim transcript of the interview Q: How have you responded to all the events of September, the move in the market and where it has left prices now? A: A lot of good things have happened, and hopefully, we aren’t done with that yet. This is probably the start but at least the tide, in terms of direction and the repair of whole economic process, seems to have changed. I think the biggest catalysts that we are looking for incrementally are activity on the interest rate front as well as getting the whole capex cycle back on track. If we do see some more concrete measures in that, it will help as well. Fundamentally, we are a lot more comfortable with the situation in terms of how it is likely to hold in the next couple of years than we might have been six months ago. Clearly, any reduction in interest rates and the fact that results have continued to be fairly modest, we seem to be getting to a point where even margins seem to be bottoming out slowly. It is a slow recovery but from a market stand point, it is a good base that gets formed for better performance going ahead. Q: A lot of people debunk the parallel between the 2003-2007 phase saying that none of those ingredients are in place to start fuelling a bull market this time around. But do you sense that in the next four quarters, maybe some of these elements will slowly start to fall into place? A: It is not perfectly accurate but the closest parallel we can actually draw to today’s market scenario is 1996-1997 phase, where the general economy was in a slowdown. Banks were laden with all sorts of bad loans. Things pretty much looked like they are looking today. We had consumer stocks on a bit of roll at that stage as well. I think 2003-2007 was fairly unique where globally, all markets went up and liquidity was ample, and we saw strong growth happening globally. That doesn’t seem to be the scenario for the next 3-4 years at least not in that scale. It is more akin to the 1997-98 or around that period of time, where things were fairly slow for a while, and then gradually started recovering. Q: On hindsight, what would have made sense to do in 1997; the global tailwind may not be there, if you liken it to that kind of phase, what is the prudent investment strategy for people who are getting in now? A: Clearly, in a very slow economic phase, the whole cyclical part of the market tends to get undervalued. It takes a while for them to come back but valuations tend to bottom out before that. In the next 1-1.5 years, we are not seeing a bit of equalisation to take place now between the fairly extreme valuations that exist in the market for the past couple of years. You don’t have any fundamental evidence for backing that up today but it tends to come gradually over time. When we look for value in the market, those are the areas where we find it most difficult to take a fundamental view. Or it is not very apparent to you today, but turning slightly optimistic on that part of the market, takes time. We have been repeatedly saying that this is still a patience game. But there are periods where the market will cover up quickly and reward investors eventually. There will be some periods and there will be volatility. This is not a one-way bull market for sure for some time. Nonetheless, it is a market that clearly offers returns. Therefore, if you patiently stick to it and start allocating, any interest rate reductions will also very important catalysts for equities in general. Clearly, one has to be more optimistic now than before. _PAGEBREAK_ Q: What do you do as a fund manager because it’s not a phase where defensive stocks have started underperforming in a major way? Do you still keep a large part of allocation in those kind of sectors or do you start going down the value chain because that will generate the alpha over the next two years? A: What we do as fund managers is probably different from what an individual investing in the market would do. We operate with benchmark indices etc; we need to look at our portfolios in that context to start with. In this phase, what you end up doing is to remove the tilts of your portfolio. If you were very defensive earlier, you neutralize that, try and keep your sector broadly in line with the index or small adjustments here and there. It’s the stock picks that will probably add lot more value at a stage like this. We are not swinging from one end of the spectrum to the other. It’s still a bit of a balance in the portfolio. But I have got to say the larger value in the market today seems to be in some businesses that are more cyclical in nature generally. Q: If you were an individual investor, and you did not have the constraint of being relative to a benchmark and you could do what you wanted, how would you tailor your portfolio? A: It’s a complicated question but what we have been telling individual investors is if you have the ability to buy and hold, you want to own good consistent businesses over time because they do deliver value. If maybe buying them expensive today, they may not perform for a year or two but over five-ten years, you will make money. It is proven that enough now in the last 15-20 years, they are very consistent and return to deliver over a period of time. If you are more astute and you are able to control your emotions then the cyclical part of the market seems like a fairly interesting part of the market where there is more degree of undervaluation at this stage. But you have to have a very strong mindset for that, you cannot be very skittish or keep reacting to news that you keep hearing in the market. It’s a bit of a temperament of the investor, to some extent, in terms of how you would weigh cyclical and defensives in your portfolio. Defensives are very easy to hold on to. Cyclicals give a few more grey hair than you would like but it can also produce some fairly good returns especially in bad times. For that part of the market, investing in bad times is the best time. For defensives, anytime pretty much is a fairly decent time as long as you are in the right horizon. Q: When you say cyclicals, what kind of sectors are you broadly talking about? A: Anything that is interest rate sensitive or tends to have little debt on its books. Materials, metals, industrials, capital goods companies, infrastructure related companies fall in this category. Banks are part cyclical, part defensive but you can categorise banks into it. Some parts of automobiles again tend to be interest rate sensitive. Q: Do you think the market might be positively surprised over the next one year by what the RBI may do on interest rates? So far, inflation has been sticky and the RBI has been very reluctant of cutting rates very aggressively. Do you see that as a plank for serious equity market out performance over the next four quarters? A: I hope so, it is very difficult to judge it for that period of time because there are too many variables in-between. But we can clearly judge it on what we can see today. It does look like in the near term, we should have some cuts hopefully. But going back to that earlier point of 1997-98, it was really what helped eventually. At that point, interest rates were really high; and between then and 2003, we had interest rates more than halving in the system. That provided the whole catalyst for the banking sector to come out or to be able to write off a lot of the non-performing roles at that point in time or just give companies more breathing space in terms of waiting for the economic upturn. I think interest rates have to be fairly a large catalyst eventually for things to come back on track. Of course, the room now is much lower than it was then but at least upfront, it does look like rates would trend lower. Q: Can you draw any comparisons with past phases, where India or other emerging markets, have rallied significantly because of strong or improving internal fundamentals without the support of major liquidity like we saw in 2003, 2007? A: It is not enough of that history. Again, what happens is every time, there are different classes of investors who tend to influence markets. For instance, today, we are seeing ETFs as fairly large players globally. If you look at the global landscape, what is making it a challenge to invest globally is the fact that government policy is tending to influence markets quite significantly. Controlling of interest rates in the US has an impact on US equities as well as flows elsewhere in the world, also money printing, controlling of interest rates etc. So, government policies are influencing market performances. To add to that, there are ETFs, which are very large index investors who keep moving from risk-on to a risk-off mode; moods keep changing all the time. All of this is creating fairly big flow movements, which can be sharp, and therefore, cause reactions to the market time and again. It is very difficult for investors to stick with one line of thought consistently; you keep getting hit by data points all the time. It is not as simple as just saying, we will have our own growth and we will be divorced from what happens globally. Flows will play a role but flows aren’t the only reason for markets to perform. Finally, if you have the fundamentals in place, the performance will come the flows will just find their way. The way we would look at our market today is different for India. If we look at corporate profits, margins are fairly low; interest rates can hopefully come off a little bit. If you start seeing some pick up in capital expenditure, which will initially start from the public sector companies, and much later probably a year or more down the road, post the elections, from private companies. All of that will then, over the next 2-3 years, try and create a slightly better economic environment than we are seeing today. There is reason to be optimistic here; I am not as clear on whether the whole global economy will revive. Our view is clearly that will take a lot longer but at least the interest rate environment globally looks may be on the lower side for a couple of years. Therefore, money flow should be reasonably active. Combining all these elements together, it does look like there is enough reason for global investors to keep an eye on India and to invest into India relative to many other choices that they may have. Hopefully, our economic prospects improve. _PAGEBREAK_ Q: What about local factors like politics because the September impetus has come from the political front? Now we get into parliament sessions, maybe elections over the next 12 months or so. How big a factor could that be for the equity market could? A: It’s a big factor and global investors tend to look at this very closely because a lot of policies and the continuance of policy is critical with the government. The reason why we are saying it is not a smooth ride is precisely for these reasons. There are too many factors along the way, there is a big election year coming. All of that, therefore, will create mood swings from time to time when sentiment changes, but finally, ride through all of that noise and confusion. None of us can predict it fully today but one constant that we have to keep looking for is whether the corporate environment is bottoming out or not. If we talk to corporates today, nobody has much good things to say at the moment, which is typical when things are fairly low. But it is incrementally every quarter we need to keep asking the question. Our feeling is that margins are in that phase where they are bottoming out. The feeling is that we are going through a phase now where fundamentally at least, over two three years, things should get slightly better. So that is what is finally important to determine the market performance over that period of time. In the near term, you keep getting news back and forth and that’s just the nature of the market. Q: Globally, a lot of people have walked into India over the past few months, they have invested, they have changed their under weight stances as well in pockets. But the local crowd seems quite unconvinced; mutual funds are still facing redemptions. It doesn’t look like the local crowd is saying that things have troughed out and we start putting money from fixed income into equities again. What do you think it will take to do that? A: It is disappointing frankly to see the level of redemptions that have picked up post the market improvement and post all these policy measures. Confidence locally seems to be still fairly poor. Almost most mutual funds have continued to see fairly strong redemptions. That is a bit of worrying factor; you don’t want the market to eventually move up and domestic investors not participating in it. But I think there have been other alternatives; there is gold, property, fixed income offering reasonably decent returns over the last few years relative to equities. Therefore, I guess there was logic for investors to still stay away from equities.  The question is incrementally is that equation changing? We do think in some ways it is. Gold seems to be now pretty much at a bit of stable point; it is not moving up the way it was earlier or the rupee at least is not contributing to it. Similarly, as liquidity improves, interest rates hopefully come off, may not offer the same yields. Property also seems to be a bit sluggish at the moment. In that sense, the case for equities has been improving. It is not a clear cut case for only equities, but over time, people will adjust to that fact. And if you see the market stable for some time, the confidence will come back. Investors have probably got a bit tired of the volatility and the lack of trend formation of the market.