Keeping in mind the macro situation, how are you constructing your portfolios?
We are in an environment of dichotomy where valuations are attractive but sentiment is extremely poor. Markets are expected to remain volatile and can move either ways on valuation and sentiment. It is therefore a tough call deciding what exactly one must do within a portfolio.
I would go so far as to say that the easy part was the last two years, when in view of the grim environment, we expected cyclical stocks to underperform and non cyclical to do well. The question now is whether cyclical stocks will continue to underperform? The cue for that will come from the economic data.
In such an environment, we are continuing to be cautious in our portfolio construction but are open to changing our view at any point in time.

Can you give me an example of circumstances that will change your view?
We believe that the most significant concern for the economy is the current account deficit. We believe that a diesel price hike will bring respite to many of the macro-economic issues affecting the economy like the fiscal and current account deficit. If the price of diesel goes up significantly, the deficits will improve. A significant diesel price hike is implemented, then we will look consider making the portfolio more aggressive.
We also believe that the improvement in fiscal deficit also has the potential to benefit the infrastructure companies which is currently under stress due to the high interest costs. This will help switch the baton from consumption sector towards infrastructure sector which is necessary for growth sustenance, even if it comes at the cost of moderating consumption growth. This we believe will be another positive for the economy if it plays out.

What do you mean by aggressive?
All except healthcare, consumer staples, technology would be defined as aggressive.

How important are global events?
Global factors are very important but what really impacts us are the local factors. India has been an underperformer amongst emerging markets due to the local bottlenecks.
Our belief has always been consistent that local factors have a long term impact, not global. While global factors can have a short term impact, local factors is what will drive long term economic and market direction. However, the positive is in the fact that home grown challenges are within India’s control and historically India has tended to reform systematically in periods of crisis. So, going back to my earlier point, a hike in diesel prices is an important local positive factor and has the potential to help address key concerns of the twin deficits.
Therefore, the Indian market, while might be impacted by global factors, market correction specifically due to global problems will be opportunities to invest and capitalize on for investors.

How are you balancing this macro-micro picture?
If we see a big change in the macro picture, we will surely relook the portfolio. Currently the macro triggers have been driving the market and has been doing so for the last three years. Till we stabilize our current account deficit, we will continue to have a situation where the macro will play a very important role. The moment the current account deficit comes under control then micro factors will take predominance.

Any companies you will not touch?
We are avoiding highly leveraged companies. When interest rates came off, we did not see a situation where the practical interest rates came off. While a dip of 50bps should have had an impact, rates have not really come down because the current account deficit has ensured that the money market is tight. We therefore are in phase where the macro is controlling the market.
However, while we are currently avoiding highly leveraged companies for a while, we are always considering whether we need to relook the view. We are on the lookout for when to add cyclicals like Capital Goods and other interest rate sensitives.

Where are you investing now?
We are once again overweight Telecom. The field has become very complex and we believe that in the long term the sector cannot be sustained with such complex regulations We continue to be overweight all export oriented sectors like Technology, Healthcare & Textiles with a positive view for long term investments in view of the high prevailing trade deficit in India.