Whether it was 2001, 2008 or 2013, whenever Indian markets have been trading at a reasonable value and have come off sharply because of global factors, it has always been a good opportunity to buy. That in a nutshell, is the message from Prashant Jain, Chief Investment Officer and Executive Director, HDFC Mutual Fund.In an interview to CNBC-TV18, Jain says investors should not be distracted by the ongoing global events, and should instead focus on India's improving fundamentals."All macro indicators are green, and we should do well over time," Jain tells CNBC-TV18.According to Jain, the market's aggregate price earning multiple is quite reasonable, and corporate earnings growth is at a 17-18 year low.With the economy on the path to recovery, things can only get better from here on.He says India should not be too concerned about weak global demand as its share of global exports is low. At the same time, India will be one of the biggest beneficiaries of lower commodity prices, particularly crude.In effect, lower commodity prices should more than offset any negatives arising from lower exports, Jain says.He says the market is in a transition phase from a consumption-led growth story to an investment-led one.Investment cycles take time to revive, and an uptick is underway, he says. However, the recovery in the manufacturing sector will be slower, and that is partly because of the weakness in the metal sector.Jain is bullish on financials as these benefit the most in a recovering economy. He is bullish on consumer discretionary, but is cautious on FMCG as he feels the high valuations are not yet pricing a much lower inflation going forward.Investors looking to invest in equities for the next three to four years can safely expect a 15 percent compounded return, he feels. Below is the transcript of Prashant Jain’s interview with Latha Venkatesh and Sonia Shenoy.
Sonia: You have been with us through many of these patches where we have seen big swoops on the downside and equally big swoops on the upside. What is your advice to investors at a turbulent time like this?
A: As I have often said in the past and just to highlight once again that equity are volatile and a hard to predict asset class over a short period of time. What we have also seen is that one should focus on the local fundamentals because that is a driver of market medium to long-term. And one has observed that whenever market has fallen despite good fundamentals locally, due to global factors, these have proven to be very good times to invest in the medium to long-term view. So, I feel the same that the Indian economy is on the path to recovery, our current account is in very good shape, India has great growth prospects, our interest rates should come off as inflation has fallen much more than what was expected. So, all macro-economic indicators are green and we should do quite well over time.
Latha: Actually, you were with us, if I remember right, almost exactly two years ago when the market was falling like nine pins and the Nifty had touched 5,100 intra-day. You were in our studio at that time and you were telling us will you ever get State Bank of India (SBI) at these levels? Will you ever get any of these stocks, I mean you specifically picked up certain stocks and said will you ever get these at these levels? Can you say that with the same conviction of many of the Nifty stocks even now?
A: I do not recall, your memory is probably better than mine, but I think there is value in this market. I mean you look at the aggregate price- earnings ratio (PE) multiples which are reasonable. Corporate profitability is at a 17-18 year low. So, there are challenges in the commodity space but for many other companies, margins should improve. And as we go along, I see no reason why growth rate should not pick up and interest rate should not come down. So, I am optimistic about the markets. I just feel that the consumer companies might disappoint because the multiples are probably not pricing in the impact of a much lower inflation which will lower the growth rates of these companies quite significantly.
Sonia: That point is taken about the local impending growth story. But there is growth despair amongst global markets and that is what causing widespread pessimism. Do you think that the impact of the contracted demand in a market like China has already been priced into global markets or could there be some more to go?
A: One, India’s share of global exports is extremely low and our growth is more correlated to how we can grow that share and less to global economy per se. But, on the flipside, we benefit a lot more from lower crude prices. India is one of the very few emerging markets which benefits from lower commodity prices. Most emerging markets will come under a lot of pain. So, India clearly stands out as being a big beneficiary of lower commodity prices which I think more than off-sets several times any negative impact on the exports that we might see.
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Latha: Your point is entirely taken about India’s strong points in this situation – domestically consuming economy and consumer of commodities rather than exporter. But, our question is more with respect to markets. Markets do not always reflect these fundamentals. At this point in time, since we tend to get swept away by the way global markets move, what is the sense you have made of global markets? Are they likely to price in more panic over China? Are we likely to see other such mad days and fairly lower levels in the major global indices?
A: I do not think I would like to comment on markets outside India and there are many people who are more qualified to do that than I am. But what I can share with you is that I have seen that whether it was 2001, whether it was 2008, whether it was 2013, whenever Indian market have been trading at reasonable valuations and have come off sharply because of global factors. However, stock markets are indeed driven by sentiment over short periods of time and that is what we have seen on each of these occasions. But if the local fundamentals are good after three months, after one year, these things pass and with the benefit of hindsight, you realise that it was actually a good opportunity. Nothing was wrong with the country. It is just that stock market moved down because of weak sentiment towards equities globally.
Sonia: There has been a relentless flow of money into mutual funds especially in the last three-four months. The sentiment has picked up significantly. What would your own estimate be of how the flows will continue? Do you see the same enthusiasm continue for the rest of the year? And in terms of individual pockets or sectoral moves, what do you see as the trend here on?
A: Sectors, I mean, I have been saying for some time and I think the markets are in transition and we will move probably away from a consumption led markets to more towards investment led markets. Investment cycles take time to revive and we are in the early stages of that revival. As far as local flows are concerned, I think they should continue because equities represent the best performing asset class and the prospects going forward are quite good and the physical assets are not doing well – real estate and gold. In India we have seen massive increase in allocation towards physical assets over the last few years and that process is being reversed. So, I am quite optimistic about local flows going forwards for the next few years.
Latha: What do you do with financials at this point in time – public sector banks, private sector banks, non-banking financial companies (NBFC), since the view is that global commodities are almost in a deflationary situation and may continue that way?
A: Yes, that is a challenge, but as you rightly said, it is cyclical. But the loans to these companies are backed by very good assets and there could be some stress. But we have seen in the past that whenever the local investment cycle revives, the non-performing assets (NPA) tend to go down and these companies do well. So, I would simply suggest that outlook for financials is quite good because India represents a growing economy and these companies should grow faster than the economy itself. However, specifically there is value in companies or in financial institutions which have more loans to corporate because there is some stress and that is where the valuations are attractive - both in the private and the public sector.
Latha: This injury of 1,000 point or 1,500 point fall that we saw in the Sensex coupled with the fact that gold has crawled back, you do not think is going to impact the flow into mutual funds? Will it? It is too short a period you think?
A: I do not think so because which is more important – a four day move or a four year return? So, clearly, I would simply say that even our gilts, government securities (G-Sec) funds are probably meaningfully superior option to gold because today the G-Secs themselves are offering 4 percent real yield. I do not think that such a short move over such a short period of time will lure people back into gold.
Sonia: So, for investors who have a horizon of about three-four years, what kind of annual rate of return would you expect to see from the equities here on?
A: I mean 15 percent is the long-term return that Sensex has delivered and that is in line with the nominal gross domestic product (GDP) growth rates of the country. And I think that is what should happen, it could be slightly above or slightly below but there is no meaningful excess in this market. If at all there is an excess, it is in the very high quality stocks which means the risk is probably a bit lower there. So, I would maintain the same view that around nominal GDP growth rate is what we can expect going forward.
Sonia: Coming back to the point that you were making about that we being in an early stage in terms in terms of the revival of the investment cycle. The government has in some form managed to push the investment cycle through higher infrastructure spending in some sectors but the feedback that we get from companies is that they are still holding on to their purse strings waiting for some reforms in terms of goods and services tax (GST), labour reforms, etc. How long do you think it would take for the earnings cycle to pick up and for this revival in investment cycle to flow through into the companies’ books?
A: You are right. I agree with you that it is the infrastructure capital expenditure (capex) which has revived or in the process of reviving. I think it will still take some time for the manufacturing capex to revive. The reasons are two-fold. One, the capacity utilisation in manufacturing is still quite low and second, the metal sector which is a very large driver of industrial capex is experiencing weak cycle and the sentiment is also weak out there and I hope and expect the government considers this because reviving metal capex is very important. So, if government hand-holds the sector in these weak times, it will increase the confidence of this sector to invest in projects which are very long gestations. If you do not invest in the steel sector today, in three-five years' time, demand in India may out step the local supply. So, we need to think slightly longer term there.
Latha: What is the hierarchy of sectors for you at this point in time? For instance, if you were to split Rs 100 incremental investment.
A: I do not think I would like to answer that in specific terms but, as I mentioned to you, we are more positive on the investment led cycle and I think consumer discretionary is also looking quite good. But the consumer staples to my mind are something to be careful about. We should also be watching, going forward, how the currency behaves. Though sentiment right now is quite weak, but as the year progresses, if current account is in surplus or in balance which we think it will be, then the currency might actually start doing well which will not be very good for the export led sectors as well.
Latha: So, IT is not one of your favourites.
A: IT is good. I did not say it is not one of the favourites, it is a good sector. We have a balance view towards IT.
Sonia: Between the midcaps and the largecaps, where do you see higher risk rewards for the next one-two years?
A: Midcaps have done quite well over the last few years and midcaps are a very large basket. So, a skilled person can always pick up few winners. But that apart at a very broad-based basis, on general terms, I would say the largecaps look better compared to midcaps.
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