Last Updated : Jan 15, 2016 03:42 PM IST | Source: CNBC-TV18

Panic best time to invest for 2-3 yrs: HDFC MF's Prashant Jain

According to Jain, Executive Director and Chief Investment Officer of the fund, corrections like these give an opportunity to invest from a two to three year perspective. Specifically, corrections led by global factors have always been great buying opportunities, he says

It may be wrong to compare the current downtrend in the market with the crash in 2008, HDFC Mutual Fund's Prashant Jain tells CNBC-TV18.

According to Jain, Executive Director and Chief Investment Officer of the fund, corrections like these give an opportunity to invest from a two to three year perspective. Specifically, corrections led by global factors have always been great buying opportunities, he says.

He is bullish on the Indian economy and cites the "attractive" market capitalisation to GDP ratio as an indicator that it is a good time to be putting money into equities. Also, at roughly 14 times one year forward earning, the market is close to bottoming out, he says.

Jain advises shifting to large caps from midcaps, saying the valuations of some of the smaller companies are still high despite the correction.

Below is the verbatim transcript of Prashant Jain’s interview with Anuj Singhal on CNBC-TV18.

Q: It has been a treacherous run for the last two weeks or so, not been a good year, not been good start to the year. But, are the markets now entering a value zone from a long-term buying perspective? Would you advice deploying some cash at current levels?

A: If you look at the last seven to eight years, eight years to be precise, from January 2008 till date, the index is up only 20 percent; the largecap index. The nominal gross domestic product (GDP) would have grown more than 120 percent over this period. So, I think definitely the market cap to GDP of India is in a very attractive zone. Therefore, I think the outlook for the markets over the next few years, to my mind is very positive. I have also seen that whenever the markets in India correct, driven by factors mainly outside India, these have proven to be great opportunities to invest with a two to three year perspective. So, whether it was 2001, 2008 or 2013, all these corrections were driven by external factors. I think the local economy is improving fortunately and next year we will see the impact, substantial impact of the lot of steps which have been taken in the last 18 months. So, I am quite optimistic on the economy and on the market going forward.

Q: What if it is 2008, it may present great buying opportunity but at what point and is there a risk of 2008 playing out in terms of correction as well for global markets and for Indian markets?

A: I don’t think so because when 2008 took place, 1) the largest economy in the world was in pain. Today the largest economy is doing quite well. So, that is point number one. Even in China, the problem is of slowing down. I don’t think there is any need to panic about China. You look at their foreign exchange reserves, you look at lot of things, it is an incredibly strong country, very strong economy. It is just that the growth rates are moderating and I don’t think we should read too much beyond that into China.

The second key difference is, why it is wrong to equate this even remotely to 2008 is because before Lehman, the starting price to earnings (PEs) in India, the peak PE were 25 times. The market bottomed around 11-12 PE; today we are already at 14 PE. So, even in the worst phase of panic in Lehman, you bottomed out at 11 PE and today you are not too far away from that. So, I think any comparisons are quite misplaced.

Q: Last year was all about bottom-up stock selection, a lot of midcaps did well, a lot of smallcaps did well, a lot of people’s portfolios did well in 2015 because they were in midcaps and smallcaps. Do you see that reversing now and would you advise people to now look to the safety of largecaps and move out of midcaps and smallcaps?

A: I think even though we have not timed it perfectly, but we have been saying for last one year or so, on several occasions one has said that the midcaps are relatively more expensive or less attractive than the largecaps. I think what has happened is the earnings disappointments or earnings pessimism has been built into the largecap valuations. However, I think the same because of weaker price discovery, lesser research coverage the likely earnings downgrades in many midcaps, I don’t think has really played out.

So, when I look at these markets, I feel several large businesses have actually become midcaps because the market caps are so low and several small businesses are trading like largecaps because the valuations are so expensive. So, I don’t think this is going to sustain. It is hard to justify a very significant premium for a company which is smaller in size. However, having said that, the midcaps space is so large, it is so vast, that for someone talented or for someone who does enough homework, it should be possible to pick few good stocks here and a few good stocks there. However, as a group, I think next few years to my mind, largecaps should outperform midcaps.

Q: Within largecaps where do you see leadership then? The market has struggled for leadership all through last year especially in private sector banks, PSU banks of course we all know, what has happened, but even private sector banks, baring couple of banks, have been butchered. So, from these levels, what do you think will lead the largecaps?

A: I think the economy and the market to my mind are in transition. So, the economy is coming out of a very high inflation phase, very high current account deficit, a phase in which currency depreciated 40-50 percent, a phase in which capital expenditure was extremely weak and a phase in which fiscal deficit was going up and it supported consumption. The earnings growth was limited to very few sectors, basically linked to consumption or to exporters or to retail oriented banks. Therefore, I think, since market always loves sustained growth or wherever there is growth, you tend to crowd in there, I think these sectors have become quite expensive to my mind.

When I look at the next one, two, three or five years, I think all these factors are changing. So, high inflation has become low inflation. Your foreign direct investor (FDI) inflows are more than the current account deficit of the country after a long time. Fiscal deficit is moderating, inflation is down, interest rates have come down a bit – I think they should go down more and I think there are definitive signs about a strong recovery in capital expenditure over the next few years. I think it will be lead by infrastructure space, by government spending, private capital expenditure will follow maybe after few quarters.

Therefore, when I look at where the markets are today, I think they are in transition. I think the leadership in these markets will change. I look at this fall as a process of that leadership change. So, when market recovers, it will not be the leaders of the last few years which will outperform but a new leadership should emerge. I think these sectors will be related to capital expenditure.

Q: This is one thing which I really wanted to know. We have Infosys, again surprising on the upside. We have seen Tata Consultancy Services (TCS) hit 52 week lows, we have seen Infosys outperform, is this cycle changing or it has already changed but do you think it will change even more in favour of Infosys compared to TCS since you have investments in both but my sense is that you have more investments in Infosys compared to TCS?

A: The way I look at this is that both are great companies. However, while the business model is same, the details about clients, your exposure to certain geographies would be different. I think it is a coincidence or just by chance that a particular company has some challenges in its sets of clients. I have seen in last 10 years, there was a time when Infosys used to trade at a massive premium to TCS; 2006-2008, it lasted for a few years. If you go back three or four years, TCS was trading at a 30-40 percent premium to Infosys and today again both are at same par. So, I think both are great companies but even great companies can have some variations in performance depending on their clients, their exposure to geographies. I think Infosys is coming out of a lean period of performance and TCS has had very strong last few years. So, I think there is something called mean reversion in life and that is what we are experiencing here.

Q: So, can this mean reversion take us back to 2006-2008 phase where Infosys goes to 20-30 premium over TCS and if that happens, does Infosys rally, TCS falls or do both happen?

A: I think it would be extremely hard to say that, but the market always loves or gives more value to the recent performance. So I guess TCS is probably more owned by investors than Infosys and if the performance of Infosys is better than TCS for a few more quarters then it is logical to expect markets again, since they give more weightage to recency that Infosys could have some premiums. But again, I would come back to the same point, both are great companies. When the going is not good for one of them, they are capable to bring in corrective measures and that is why whenever one of the companies, either of the companies is at attractive valuations, I think it is a good long-term investment opportunity.


Q: Would you be willing to take a contra bet on PSU banks right now. It is the most hated sector but if your call is that we may have a bit of valuation catch up or transition phase in the market. Do you think PSU banks can be good value bets at this point in time?

A: While the market focuses on ownership more I feel whichever bank in India, whether in public or private sector has given money to infrastructure space, manufacturing space there is pain there and that is quite visible in the market. So, we have invested in the stocks sometime back. It was not the best of timing but when I look at the next few years we are probably at the end of the asset quality problems. Today we see substantial progress on the infra side in fact the asset quality pains have moderated quite a bit in the infrastructure space. The new pain has emerged from steel sector and that is where bulk of the concerns are in the market space.

If imports can be controlled and if steel demand recovers which it will starting next year very strongly in two years time the fortunes of the steel industry will also change. So, the asset quality pain is linked to the economy cycles and we are coming to the end of it. So, I would be very surprised if the corporate banks don't outperform in these markets over the next few years.

Q: The devil's advocate argument here would be what is happening in China and we have further devaluation in Yuan and the steel industry crying for more and more anti-dumping measures in that kind of an environment how will steel companies make money. We have seen over the last few years how things have panned out. Are you taking a contra call over there in that case?

A: What you are saying is right. No one can fault you for saying that steel is in significant excess supply in China but let us not forget that Indian companies have a significant cost advantage over the Chinese companies. So, if Indian companies are making small amount of profit I am sure many companies in China are making losses. So, if you look at the iron ore mines in China, the underground mines have a very high cost structure. So, these mines cannot sustain at the current prevailing ore prices. So, some of these capacities will have to go out over time.

So, India has a natural significant competitive advantage in steel and that is why the future of this industry is good and in my opinion given the large needs of the steel demand in India, given the competitive advantages that we enjoy, given the large employment that it can create it can support Make in India for example the government will at some point of time support this industry against unreasonable competition and it is not unique to India.

Q: Collapse of crude, we have now USD 20/barrel on Brent. Who would have thought that was possible at USD 120/barrel. Is it now hurting India more than benefitting India. So far last year we all talked about the macro benefit to India and that has played out but are we now at a stage where the risk of global recession is hurting India and you would rather see crude go back to USD 40-50 per barrel than stay at USD 20-30 barrel?

A: It just tells you once again how hard it is to forecast commodity prices. When crude was USD 140/barrel people were saying it is going to USD 200/barrel. So, these are very sobering reflections to how hard it is.

I would not agree to what you said. The lower the crude goes the better it is for India. It is better for our current account, it is better for our fiscal. It is better for the consumer. But what we would ideally want is some stability. If it grows to USD 20/barrel and then it rallies back to USD 60/barrel I don't think that is good for us. I would rather it stabilises at USD 30-40 per barrel. These prices are quite comfortable for India and what we need is stability and not too much volatility because that impacts the calculations of the regulators, the government. But as I said earlier these are market driven prices. So, you and I can wish for anything but ultimately it is the market which will decide where crude is settling.

Q: Since we are talking about crude we have to talk about the sector of this year or the last 3-4 months which has been aviation. We have had a new listing. The largest player has listed and that has provided a valuation benchmark. As a fund manager are you interested in looking at aviation in the current prices?

A: I would like to pass this, I would not like to comment on individual sector valuations but it is a great growth sector because the number of people who can potentially fly in India is very large compared to who are flying today and the drop in oil prices has made air travel more affordable but capacity addition in the sector is extremely easy. So, unless the market grows at a very high sustained growth rate year after year there could be disappointments in profitability somewhere along.

Q: Let us get back to the larger market thesis. All through last six months we have seen FII outflows and we have seen DIIs sort of contributing or at least supporting the market, a lot of this is SIP investment, which is more stable compared to direct investment in stock markets from retail, would you expect this SIP inflow to continue or is that at risk given the way the markets are panned out and given the way global markets have been unstable and there could be a bit of a risk factor over there?

A: I would hope and I would suggest strongly that this is a good time to increase your SIPs. So as I was saying earlier whenever in India we have seen markets correct around reasonable valuations driven by external challenges, these have proved to be great times to invest.

I think the Indian investor is also realising even though slightly late, the attractiveness, the charm of equities and I think what is happening is simply the maturing of the investor and let us not forget -- what is the industry collecting today? It is collecting a billion dollars a month, USD 10-12 billion a year. That is 2 percent of India's household savings. We can buy gold worth USD 30-40-50 billion a year which gives you inflation linked returns and when we are collecting USD 10 billion in equities, it seems very large but it is very small.

It is just that we have not looked at or understood right way. I think these numbers have the potential to grow much bigger overtime.

Q: Do you see an equity cult developing then for retail audience?

A: I would not like to use the word cult but the Indian investor is understanding equities a lot better. The distribution has become a lot easier. All the banks who are not selling mutual funds 10-15 years back, they are beginning to sell. If you look at the papers today, SBI has launched its wealth management business. If SBI starts selling equities, you can imagine what will happen overtime.

Q: You sound like you are quite positive on the largecaps and that is where you will expect the next round of markets rally, would it be fair to say that once this global mayhem settles down, our markets could make a move back towards the previous highs in the second half of 2016 or first half of 2017, would that be a reasonable argument or reasonable assumption?

A: Equities are an asset class where the longer-term is known with greater certainty than the shorter-term, where the destination is known with greater certainty than what were the markets will take to reach there. So it is hard to say where the markets will end in 2016 but if you leave the timeframe open, the economy is recovering very nicely. Next year, the improvement in capital expenditure will surprise most people.

India's current account, FDI, fiscal deficit, all indicators are in very good shape and markets are where they were seven-eight years back broadly. Profitability of lot of sectors is stressed, this will normalise. So I think the future for India, future for equities is very good but let us not try to put a number because then it takes you away from the big picture. So I would simply suggest to people that whatever is the portion of wealth which they can spare for two-three years on which they can financially and emotionally tolerate some volatility, invest that in few good funds and be patient. To make serious money in equities, all you need is patience. That is all that you need. There are funds, which have made money 30-40-50 times in 20 years.

What was needed, it was just patience. So move away from the daily, weekly, monthly, quarterly, 5-10-15 percent up and down, allow your investments to compound because compounding takes time and I think India is a great compounding story.

Q: So the destination is beautiful but the entire drive might not be picturesque. There could be in-between roads where you will have speed bumps and you will have to be careful.

A: That is true for life in general as well.
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First Published on Jan 14, 2016 12:55 pm
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