Anoop Bhaskar, Head Equity, UTI Mutual Fund, feels that investors should look at market levels from where the probability is of making money on a one-, three- and five- year basis. With over 16 years of experience, he shares his views on the market and how investors should evaluate their entry.
What is your market outlook right now?
The market outlook after the RBI policy is that in the immediate month or two we could see some pressure on the downside, especially with some event which will have a negative influence. However, the last 10 calendar years has shown us that 80 per cent of the time the second half of the year has done better than the first half of the year. The first half of this year, we were down negative 8-9 per cent on the Nifty, so we should have a better second half. Valuations are not as much of a concern as they were last year in November-December, so valuations are fairly stable. The expectations for growth have also tempered down, and our earnings growth, which for FY12 which started last year in October at 25 per cent, will slowly be reduced to 16-17 per cent, which gives a good indication that expectations are lower and, therefore, any recovery from the second quarter and financial numbers from the September quarter could surprise the market, and lead to an improvement in sentiments.
So you are expecting that September quarter we will start getting positive surprises?
We will touch the bottom in terms of expectations, so people will downgrade earnings even further after seeing the September numbers, which should be the bottoming out phase of the market. As I mentioned earlier, we have seen in the last few years that November-December, because of large FII investments in India, the momentum of stocks is generally upwards as people try to close the year end more positively.
The RBI action and the kind of concern shown, does it have the potential to hinder the India growth story? Is it reason to get alarmed?
It is a reason to get alarmed if you are an investor with a horizon of three to six months. Looking back, perhaps the RBI underestimated the issue of inflation and during the early phase of tightening took baby steps. Now, contrary to most experts, it has taken a “giant” step when, perhaps, it needed to take baby steps. The caveat being, unless they know more than what we are aware of on a macroeconomic perspective. Maybe their concern is that asset pricing in India still hasn’t cooled off, so land and real estate prices haven’t really come off so and they would want that to be one of the key areas which they would want to target by having high interest rates, rather than manufacturing activity. The second is that to spur investments in other forms, they have to cut down on consumption, and to do so maybe they have to keep interest rates at a level which is attractive for investors. Or, in the case of households, to curb consumption and save more and that can be used as a building block for investments at a later stage as a saving catalyst.
So, on a first impression, the move appears to be exaggerated, but if people could have faith in US Fed for decades before 2008, why can’t we have faith in our central bank? RBI has taken the middle path and in the past has eschewed taking too many extreme paths. So, my take on RBI’s move would be some very legitimate concern that the RBI has on which they are acting and it could have some negative impact on the equity market in the immediate short-term because of the move.
Given the backdrop of market outlook and inflation, as well as what is going on in the US, any broad tactical change you have done across all your equity funds?
In December last year, we reduced our weight in Banking, from having around 20-22 per cent weight, we are at 16-18 per cent weight across portfolios. That’s been one move. However, unfortunately, before the RBI policy, we had raised our holdings in Banking and Financial Services, as we thought that peaking interest rates is around the corner.. We have been overweight on Consumer and Healthcare, which are good defensives. In Energy - NTPC and Power Grid, we had a decent weight over the last six months across our portfolios. Correspondingly, we are also slow in reducing our weight in Automobiles because that was another better performing sector last year and we were overweight on it and it gave us a good performance boost. This has been a negative in the last three months, especially post the RBI’s move.
On the one hand, we are underweight on interest rate sensitive sectors like Infrastructure, Metals and Banking, this has played out fairly well for the last six months.
When you say Infrastructure, what specific sectors you are avoiding?
Mainly Construction and Industrial Manufacturing.
And you have avoided Real Estate altogether?
Yes, we have. Though we have taken some small bites in some of the South-based Real Estate companies, none exceed 1 per cent of the portfolios. For the larger ones, there was concern on debt.
In view of economic stability and the anticipation of the market bottoming out in September, when do you think the good times will be back?
Investors should look at market levels not at current market levels from where it can go down, but from where is the probability of making money on a one-, three- and five-year basis. So, ideally, the best time to buy a stock like, say, BHEL, would be when its order inflow is at the lowest or when its order inflow is at the highest. So today we are at a level where the last quarter the order inflow for BHEL was at the lowest quarterly inflow in the last five years. Clearly, from here either we take a call that the stock is going to go bust, there are going to not be any kind of industrial activity in India or it will be sub par activity in India for two-three years. Or, you believe that slowly as you build up a position at these levels, your chances of making money are much higher. Same way, if the market is at a P/E of 13-14x, where the earnings growth estimate of 12-13 per cent, which could be the case by September, will be one of the lowest earning forecast for the last four-five years. Take 2008 out of that because that was a year which was a global event, so that really doesn’t qualify - it’s an aberration. But if we take a normal year in which there are ups and downs in the global economy, not a global event as such, Indian equities have registered earning growth of more than 14-15 per cent in most of the years. The chances of you making money on a one-, two- and three-year basis from that level are far higher than say the boom period of December 2007 when every analyst was projecting 25 per cent earnings growth and valuations were at close at 25-26 times and companies were raising money left, right and centre.
So instead of being caught in a mood of euphoria, investors whenever they invest in periods of gloom and doom, have a far higher probability to make positive returns, than when everyone is bullish and gung-ho. Probablity of making positive Returns is the highest when valuations are moderate and importantly when expectation for future growth has been tempered down.
This is reasonably a good time to start doing SIPs because nobody can predict when the bottom is or when the bottom will come. If you were to take the 2- and 3-year period, I would be far more confident today to invest in equities then I would have been say in November 2010 when valuations were at 21x trailing which means that any disappointment in earnings would get punished strongly by the market. But if are close to or near the bottom of the cycle then your earnings estimates are fairly low, any positive surprises are rewarded very fast and will have very quick reflections in the stock levels. It all depends on what the expectations are.
Investors have to not only look at the market levels but also at the expectations of the market at that level. The question people do not ask is that when they invest at higher levels, how many times in the past at that level or PE growth, has it given positive returns on a 6-month, 1-, 3- or 5-year basis.
Investors tend to overlook the aspect that earnings estimates, which are an equally important part of how much money they will make in the equity market and at what levels have they come in. If they enter the market at levels where the earnings outlook and earnings estimates are at a very lower level, then the chances of them losing capital on a 2-3 year basis is fairly low. But if they enter the market when the valuations are high and the earnings estimates are very high, then it is a double-edged sword, which means that it is more luck rather than skill at that level.
The second part of the interview will appear tomorrow.