C. Jayaram, Executive Director of Kotak Mahindra Bank and currently in charge of the Wealth Management Business of the Kotak Group, says if by virtue of the markets going up your equity exposure cross the desired level, book profits and come back to your ideal allocation. Excerpts from an interview with Sanjay Kumar Singh.
Is that because consumers there are over-leveraged?
There are huge problems in the US and what you are saying is one of the big issues. When you are pulling out of a financial crisis, ideally you would like consumers to spend more, which cannot happen given the fact that they need to save more to de-leverage their positions.
The other big problem is that a lot of mortgages are still under water because house values have come down. Till that is cleaned up, people are unlikely to be consuming more, spending more and reviving the economy in a dramatic way.
What about Europe? Does the danger of sovereign default still exist?
It is tough to say, but I think with the passage of time, the chances of a sovereign default become less. A lot of money has been pumped in and parts of Europe, such as Germany, are in fact doing well. But there are parts of Europe - Greece, and to some extent economies like Spain and Ireland - that are struggling. But at this point of time the chances of a sovereign default don't seem to be high.
What would your advice to Indian retail investors be in a scenario where the markets have run up fast in a short span of time?
Standard stuff. One, follow the principle of asset allocation. There are certain points of time when equities as an asset class perform better than other asset classes. There are other times when they perform worse. The only way you can make this work is that based on your profile, decide what your asset allocation should be between different asset classes like equities, debt, real estate, and so on and then stay pretty close to that allocation in a disciplined manner, irrespective of which way the markets are going. Over the long term this will serve you well.
So should you book profits if you are becoming overweight in equities?
Yes, for argument's sake, suppose that you have fixed a certain percentage as your allocation to equity. If by virtue of the markets going up you cross that, then book profits and come back to your ideal allocation.
Which are some of the sectors that you are bullish on at present?
Over a slightly longer horizon, I would say infrastructure, capital goods, and banking are sectors we are positive about.
Could you elaborate why?
A couple of reasons. One, today there is a consensus within the government and among investors that unless we raise our infrastructure to completely new levels it will act as a bottleneck to our growth. Over the next few years we are likely to see huge growth in different types of infrastructure: airports, ports, roads, and so on. The drive for this will come from the government. But a number of projects will be undertaken via what is called public-private partnership (PPP). This will be good for infrastructure companies. And two, over the last one year or so, the infrastructure sector has underperformed the broad market.
Similarly, one of the big gainers of infrastructure development and corporate capital expenditure will be the capital goods sector.
And why banking?
As income levels rise, the upwardly mobile and aspirational middle class will consume more. One of the industries that will benefit due to this is banking - through retail loan products, investment products, and so on.
Which are some of the sectors that investors should stay away from?
Telecom is one sector you would want to be light on till some sort of consolidation happens.
How about real estate?
There are pockets of the real estate market that are overheated. But broadly I wouldn't say we are negative on real estate. If you see the sort of growth that the sector has seen in the last couple of years and is likely to see over the next few years, I think investors can make gains by investing in this sector.
Aren't real estate companies heavily in debt?
I don't think it is that much of a problem any longer. It was a problem at the height of the crisis in 2008. But after the crisis a number of them brought in additional equity and de-leveraged. So today at least in the tier one and tier two real estate companies, the balance sheets have been restructured reasonably well.