Dec 13, 2017 01:09 PM IST | Source: CNBC-TV18

Here's a fundamental view on the market from Chandresh Kumar Nigam

Watch the interview of Chandresh Kumar Nigam, MD & CEO of Axis Mutual Fund with Sonia Shenoy and Ekta Batra of CNBC-TV18, where he shared his readings and outlook on the fundamentals of the market, and specific stocks and sectors.

CNBC TV18 @moneycontrolcom

Watch the interview of Chandresh Kumar Nigam, MD & CEO of Axis Mutual Fund with Sonia Shenoy and Ekta Batra of CNBC-TV18, where he shared his readings and outlook on the fundamentals of the market, and specific stocks and sectors.

Below is the verbatim transcript of the interview.

Sonia: It has been a spectacular year so far but the month of December is not panning out so well. We have a whole host of cues lined up be it the FOMC, the Gujarat elections, the upcoming earnings in January. What in your mind is the most crucial event that could change the trajectory of the market?

A: I think if you just look back this year at what is it that has really driven the markets, I think there are two things. One is as the macro has been relatively stable, the expectation is that corporate sector earnings over a period of time will really improve. So that has been one of the guiding, people feeling confident and still putting money because expectation is over the next 12-18 months we will see more broad based recovery in corporate profitability. Second has been the global liquidity as well as more importantly availability of local liquidity and money moving into the equity markets.

I think from a medium term perspective, these two things remain the same. So, while there could be short term volatility in the markets because of maybe rising bonds yields, worries on inflation, the US rise in the Fed funds rate, the interest rates going up, I think while these can lead to some minor volatility, I think the next 6-12 months period, the main drivers which is expectations of better corporate performance and availability of liquidity will continue and that should keep the market fairly stable in my view.

Ekta: On the fringe, the hardening yields, the Consumer Price Index (CPI) inflation seeing an uptick, as well as the Index of Industrial Production (IIP) not doing as well as anticipated in the month of October, plus concerns about fiscal deficit, all this is something which will probably be overlooked by the markets?

A: I don’t think it will be overlooked. I think the markets already are responding partly to it. However, as I said, these will be short term aberrations until and unless we really feel as if that the growth is really going to completely tank or the fiscal deficit is going to go completely haywire and we will see much higher bond yields which is something which the market will carefully watch as would all the market participants do. However, as of now, it does not look like we are going into that kind of a scenario.

In fact, the central bank is of the view that growth will probably accelerate in the next quarter. Fiscal deficit is one thing which certainly markets will keep an eye on and there may be a case for some disappointment from the international fund flow perspective in the first half of the year. So the market will certainly respond to that and maybe turns a little bit more volatile as we get into the next year. However, will that lead to a sharp sell-off or will people suddenly take a very different view on the equities from a medium term perspective? I don’t think that is going to happen.

Sonia: Let us talk about some of the stocks that you hold in your fund. In your Axis Long Term Equity Fund, I noticed that you have huge exposure in the auto sector, almost 20 percent there, and stocks like Maruti Suzuki, Motherson Sumi that you hold, have already hit new highs. Do you see more scope in some of these market leaders in this segment?

A: I think one of the things which we have been saying and seeing actually in the corporate space over the last 24 months or so has been that we are in a two speed economy. I think overall people think that the corporate sector performance is not been that strong, but if you look at segments of the market, especially segments where there is more linkage to direct consumer demand, I think that segment has been doing fairly well. I think the large part of the auto sector is essentially riding on that wave of rising penetration and improving demand for products and we think that is going to continue. If that growth rate continues then why we will not see higher highs coming over the next two to three years.

You are right that sometimes some of these stocks may take a pause because they have moved up quite sharply, but a long term equity fund anyway takes a four year call on businesses when it invests and from that perspective, we believe many of these businesses which we are holding, these businesses will continue to do well from a macro perspective in terms of demographics, in terms of penetration, in terms of growth, and most important in terms of pricing power. I think that is extremely critical when you are taking a longer term call. So we are fairly comfortable holding onto these positions.

Ekta: What is your view on a couple of these new type of sectors or new ideas which are emerging in terms of sector allocation, say for example dairy space or the home décor space or maybe something a little more traditional like the insurance space which has seen a lot of IPOs? Your exposure there and your thoughts towards it as a money generator as well?

A: From a basic theme perspective, consumption and rising consumerism is a theme which we are playing across many of our portfolio positions. I think that is a long-term trend and it has shown that it has worked even in the worst of times let us say 2011 to 2014 and it continues to do really well. Some of the sectors and theme which you talked about sit very nicely into this overall broad theme. There will be obviously some sectors which will see much stronger growth if penetration levels are really low and the overall macros support these.

So, I think we are picky and choosy about sub themes, but individual stocks and being very much bottoms up if there are themes which lie in the overall broad theme of significant acceleration in growth as compared to rest of the economy these are positions which we would like to really identify and stay with for the long run.

Sonia: In fact one theme that stands out from your portfolio is the consumption theme, so you have exposure in names like TTK Prestige, Symphony, Avenue Supermarts or something like Pidilite Industries that has now started to sort of hit new highs. Are you seeing incremental gains for any of these stocks because most of them have already given huge returns over the last two to three years?

A: I think if you combine two things, one is a broad tailwind for overall volume growth in a particular sector or for a particular company and you merge it or take it along with pricing power which comes from branding and distribution strength and perception in the minds of the consumer I think these two things if they come together that is really potent combination for long term wealth creation. Some of the names which you mentioned are names which we have been invested in for a long period of time.

We have been holding these names for quite some time and we have seen one very good appreciation in the past. We would think that if the broad theme continuous, underlying growth is there with pricing power which ensures high return on equity (ROE), cash generation etc. these will continue to move forward medium to long run. Short run we can anywhere not say anything. Yes, some of these have become as you said they are touching their all-time highs and maybe from a price to earnings (P/E) perspective may look expensive.

Now P/E is are not something we really are fans of at Axis Bank. I think what we are looking for is can the business really say double the earnings over the next four or five years. If that is the case and earnings are supported by good cash flows then there is a chance that P/E will sustain and even if there is some drop in P/E you will end up making some reasonable absolute returns in these stocks even from these levels.

So, I think there are lots of such - though not all companies in the market qualify for that, but there are reasonable number of names from an overall consumption theme perspective. I would include any of the financials as well. I think they completely meet our criteria for holding on to these businesses for the medium to long run.

Ekta: I just want to get back to what we were discussing, at least for the near term we have the Gujarat elections which would be a big cue for the market how closely are you watching it?

A: I think my view is little different I don't think this will have real long term lasting impact on the market. Yes the market will react when the election results come out and maybe the whole thing will get discounted in a week or two. It may have some impact if the results are very different from what the market expects, may have some bearing in terms of a more significant move in the market.

The market have been - we have not really seen more than a 5-6 percent correction on the last now many months. But the sense which we get generally is that this will get discounted fairly quickly. Then the market will move their focus on to other things. I mean short-term there will be always be many events whether it is short-term numbers on inflation growth or what is happening in the global markets, turn of liquidity and I think the Budget will come again. So, I don’t think this is going to have too much of a lasting impact. It will be an event which will come and go.
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