Time to start buying shares, but be patient for 2 years:HSBC AMC

Surprising fourth quarter results, loan write-offs in FY16 and spotting greenshoots in some of the sectors have brought in cheers to the market, said Tushar Pradhan, CIO HSBC Global AMC, India in an interview with CNBC-TV18. The Nifty clocked a high on Thursday breaching the 8000 levels, last seen in November 2015.US Fed rate hike fears are losing their fizz, he said, adding that benign liquidity conditions, too, have led to the buoyancy in the stock market. Pradhan believes that this is the right time to invest in the Indian equity market but one must have a patient two-year outlook going forward. Largecaps, which are less volatile as compared to mid caps, have started to perform better owing to the positive sentiments around steadily increasing GDP, he said. If one wants to be more active towards the allocation of funds, people should opt for flexi-caps, advises Pradhan.Below is the transcript of Tushar Pradhan’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Sonia: The market is up 4 percent this week. What do you think is causing so much bonhomie?A: There is a combination of factors, both external as well as internal. The internal factor is clearly the surprising results on the upside. People had more or less written off this financial year and the hope was about the surge in earnings for next year.However, what has come through is that even the last quarter, this year, there seems to be some greenshoots. There have been pretty significant increases in some of the earnings, more than expectations and that has given rise to some optimism.Globally, there was fear of a rate hike which was likely to come through the Federal Reserve. But, now the talk and the gossip is that maybe they might defer it a little bit further. So, all of these, combined with benign liquidity conditions, seem to indicate that there is some buoyancy for the stock markets.Latha: There will be one set of people who would be wondering are we left off and probably rushing in to buy. So, for people like us, is this a time to dip in? Will the markets give a better time to come in? Are we in the start of something big, is the earnings season telling you that?A: The earnings season is not an indicator of the longer-term in that sense because it is just a quarter. If you were to look at a term, which is way beyond two years and look at the past in terms of being very tepid from a gross domestic product (GDP) perspective, from an earnings growth perspective -- just to shoot some numbers, if you look at the earnings as a percentage of GDP, they have been at a peak of 8 percent in our economy, the average being around 6-6.5 percent. Right now, they are close to 4 percent.So, if you think that the cyclicality in the earnings is likely to improve from here, having had two years of pretty tepid earnings growth and profits to GDP going down to that level, I think there is a very strong case for this buoyancy to come back.If you bet on that, the markets seem pretty attractive from that range perspective. But who is to say that you might not see some sort of volatility in the interim and the prices may come off, because as we all know, these markets do not unilaterally keep going up. They keep going up and then they come down as well. As long as you have a patient, two year outlook going forward, this is a nice time to start getting invested in the equity markets in India.Sonia: I was just going through your HSBC Equity Fund (HEF) that you oversee and in that, in your top holdings, you have a lot of companies that have now started to perform, which were perhaps, laggards in the last couple of weeks and months. ITC tops that list. What do you do here? Do you put fresh money into stocks like these post earnings or do you believe that they, at best, could be just market performers?A: I will not be able to comment specifically only stocks. What we want to impress upon people is that you have to classify what kind of area do you want to get invested in.The HEF also is something that I cannot talk about specifically. If you talk about largecaps, if you talk about midcaps, these are very significant opportunities that one can look at. What you are mentioning is really something to do with the largecaps.The largecaps have been underperforming the midcaps for over two years now. The differential in valuations between the largecaps and the midcaps probably have now come to a level where either the midcaps will not start to continue this outperformance or the fact that the largecaps can come back.So, it is a game of mean reversion and there is also a lot of positivity around the largecaps now for a change because of the overall expectation of the GDP starting to inch up. So, it all comes together as a combination. There is really nothing specific we can point out to right now._PAGEBREAK_Latha: So, guys like us should go for Flexi Cap Funds?A: Again, it depends on the investor, the ability to take the volatility. The midcaps and the small companies have a large range of volatility. The largecaps tend to be less volatile and the Flexi Cap, if there is an astute fund manager, he will understand the kind of opportunity given the valuations and the differentials. So, if you want to be a lot more active, in terms of your allocation towards the fund, a Flexi Cap could possibly be your choice.Latha: I wanted to ask you a slightly more macro question. How should we interpret some of the good news we got in this earnings quarter? One, Larsen and Toubro’s (L&T) numbers. Since it is such a big proxy of the economy, should that be seen as an economy turning? Likewise, we saw power and steel, the dog stocks, the dog companies reporting good Q4 numbers. So, is something going good?A: These are two distinct questions because when it comes to metals, if you see the last quarter of last year, this is where the commodity prices came off significantly. If you look at the kind of bounce back in commodity prices we saw in the last quarter of this financial year, that is the differential that you are seeing.So, the kind of commodity strengthening that we saw from November, December of last year, has started to play through the toplines and eventually the margins for most of these companies in the fourth quarter of this year.So, when you look at metals specially, it looks like a year-on-year (Y-o-Y) kind of base effect kind of thing. When it comes to companies such as L&T, it is more to do with just the over disappointment about what they are likely to do. We should not mistake the stock price movement with what they have delivered.What they have delivered is probably slightly above our expectations. They have not really shot the lights out of what they needed to do. So, there was a lot of uncertainty regarding whether they will continue to sustain the order accretions, will they continue to report margins which are normal and when the report is slightly above normal, the market just got excited about it.So, we should take all of this with a pinch of salt saying that these are the first stages of possibly a recovery coming through, but there is nothing in the numbers there to indicate that the recovery is here.However, from a stock market perspective, one should not get worried about it because the stock market tries to sense what is likely to come rather than what has already come in the numbers.So, the risk that one takes in the stock market is to expect that the turnaround is going to happen. The numbers will only be a lag effect. So, there is a lot of risk that someone has to take, but as I said, given the fundamentals, given the economic situation, that is a reasonable bet to take right now.Sonia: I was going through your midcap fund and you have many economy sensitive companies in that list. So, names like Cholamandalam Investment and Finance Company, Manappuram Finance, a lot of the non-banking finance companies (NBFC) and some of these tractor makers like VST Tillers Tractors, etc. What is the sense you are getting about things on the ground? Have they picked up in rural India and do you think that is a theme that one can play now?A: This is something that we had discussed earlier as well. The rural side of the economy has been struggling. For two consecutive years, the procurement prices of the government have been flat and that has led to some sort of softening and demand from across the region. We have seen pretty significant delinquencies in tractor loans and basically, agricultural loans as well and there is a lot of stress building up there. We have had two consecutive years of below average monsoon also hitting the area. It is just logical again with the mean reversion, to say that maybe the worst is over.We are anyway expecting an above normal monsoon and an expectation of a turnaround there, the demand for essentially goods such as tractors, such as consumer discretionary items in that area are likely to go up. There is latent demand. There is obviously a lot of wealth effect there in terms of the property prices across most of the parts in India. So, it is not as if there is no ability to pay back. So, if one looks at these signals, there is probably a lot of potential in the rural economy, which has been ignored practically, by the markets for the last two years or so.Latha: Let me come to the public sector undertaking (PSU) banks. From December levels itself -- December 2 was the seminal day when the Reserve Bank Governor announced that he is going to clean up. Since then, it has been a seminal fall from, if you look at it from year ago levels, most of the shares have halved. At an index level, it has definitely halved. Is it time to now cotton on to any of them?A: When you look at the recovery in the economy, the signals that we are getting is that the companies which are in the forefront of the execution of the recovery probably will do the recovery first. The lenders are going to take some time getting there. As opposed to in the past when if you had a lot of capital to lend at a time when the economy is turning, you are the first of the blocks.But you have to remember that the public sector banks are stressed in a sense that they are stretched from their capital perspective. Either that the government pushes in more capital, they have become also pretty circumspect in terms of incremental lending. If you remember the way the bank makes money is by lending more at higher rates. If rates are going to come off and they are going to be a little hesitant about new credit, then I do not think that the upside in the economy is going to hit them right away, unless there is some sort of capital refurbishment in some way or the other.Reserve Bank, anyway has announced some measures, which has made life easy for them in terms of assets, which are stressed and the kind of capital requirement that they have. But a large amount still rests on how the banks can get the required capital to fund the growth that is likely to come once a turnaround happens.So, I would be a little more circumspect. I would think that the recovery takes a little longer in the PSU bank space.