Pharma and to some extent some value sectors could come back into the reckoning while at the same time growth sectors look like they will have to take the backseat for a while, hence consumer names, housing and to some extent consumer finance names can be avoided, Lalit Nambiar, Executive Vice President & Fund Manager, UTI AMC, said in an interview with Moneycontrol’s Kshitij Anand.
Q. The mayhem seen on D-Street last week was shocking for investors. Do you see more downside in Indian markets? Is this the time to buy or sit tight?
A. There is no such thing as being able to time the market consistently and correctly. I know this is almost a cliché now but the more we talk about it, the more likely we all are to accept this axiom.
Equity price trajectories are far from predictable in any situation and while one can have some degree of confidence on fundamentals and can ultimately be rewarded with the outcome for an investment decision, it does not mean that the outcome is a certainty.
If one is confident of the quality of a business given its track record, then one can evaluate the opportunity against its valuations.
Chances are if this is done consistently, valuations revert to mean and the investor is rewarded. Hence there is no particularly good time or bad time to implement such action, the consistency in the process should help overcome timing constraints.
Q. What are the sectors which are looking attractive?
A. Pharma and to some extent some value sectors could come back into the reckoning. Growth sectors look like they will have to take the backseat for a while, hence consumer names, housing and to some extent consumer finance names can be avoided.
Q. Many analysts complained about high valuations of Indian equity markets. Do you agree?
A. Valuations are still looking around one standard deviation above long-term average P/E for the Nifty. Earnings estimates are likely to see some downward revisions on downstream oil. Hence, Indian Equity markets do not quite look like they are out of the woods yet.
Q. After the recent hike by US Fed as well as a rise in US bond yields, most experts feel that RBI could hike rates sooner than expected. What is your assessment?
A. The RBI is trying to focus on domestic inflation and it has publicly stated that it is concerned only with volatility in the INR and not so much with its level.
This seems to indicate that once the fuel price and food price begin to bite in terms of domestic price levels, the RBI will probably begin a calibrated rate hike cycle.
Q. If FIIs are booking profits or pulling money out of India, thanks to fall in rupee. Do you think that FIIs heavy stocks could be under weather for some more time?
A. In terms of the REER, the rupee has come closer to its intrinsic value. My sense is this is now a smaller factor in the minds of the FPI or FII.
The larger question for them will be around likely earnings growth in India and what is the call on EMs as a whole.
Q. Where do you see the currency headed in the next 6 months or by FY19?
A. It is not that the government does not have options to bring in foreign exchange. Apart from the tried and tested NRI bond mechanisms of yesteryears, there are quite a few sectors yet to be opened up to FDI such as auto, retail, financial services, education and even the norms in some sectors which are already opened up can be further liberalised. Hence, while I am no currency expert, Rs 80 in six months seems like a low probability event.
Q. Volatility is part of equity markets. But, do you think with the change in dynamics both global as well as local, investors should go underweight on equities and look at other asset classes such as fixed income at least for some time till things get settled?
A. Asset allocation should first and last only be the slave of the long-term investment objectives (and the risk appetite) of the investor. It should be accompanied by regular rebalancing in tune with her changing life-priorities and investment goals.
Macro factors can help inform this decision process and to some extent calibrate the risk. For investors closer to retirement or where otherwise the risk appetite is low, some exposure to FDs can be taken with a realistic understanding of post-tax returns versus mutual funds.
Q. Foreign investors have turned cautious on Indian markets thanks to the fall in rupee and rising macro concerns? Do you think the pullout is almost done?
A. They seem closer to ‘Equal Weight’ on India than they were in the last 12 months depending on the index you want to use as a benchmark.
Of course, there is the broader emerging market (EM) pullout and then there is India- specific currency volatility fear as well as the crude oil price risk which is probably keeping fresh FPI buying on a leash.
But, it looks like the first few major waves of FII pullout are mostly done unless we have some fresh domestic panic wave or a global meltdown. But that said, valuations and earnings may not compel some of these outflows to quickly reverse direction.
Q. Do you really think that US equities are seeing a big trend?
A. The tailwinds of lower US interest rates have benefitted most asset classes, including US equities since the global financial crisis of 2008. Now that the interest rates are rising as is the dollar, it is resulting in a liquidity crunch resonating across markets, including EMs.
Hence, it is quite likely that the asset classes which benefitted in the rate cut cycle are all likely to see some headwinds in a rate hike cycle.
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