'Long-term story is positive' | Value Research To witness the real impact of measures to boost the growth, we need the Central Bank and the Government of India on one side of the table

'Long-term story is positive'

To witness the real impact of measures to boost the growth, we need the Central Bank and the Government of India on one side of the table

Ashish Ranawade, CIO, Union KBC Asset Management Company tells why a good monsoon has been a blessing and the challenge of spotting winners in current times.

What is your outlook on the equity markets for the rest of 2013 given that there has been a lot of volatility in the recent past.
The kind of sharp movements that we have seen are due to the fact that markets today are being driven largely by sentiments and statements and less by fundamentals. For growth to materialise we need the Central Bank and the government on the same side of the table. Unfortunately that is not the case now. Whenever markets are driven by sentiments rather than fundamentals, volatility is bound to increase. However, the saving grace for us has been a good monsoon so far as we could not have digested a disappointment at this time. I also believe that as we are in an election year, there will be election-related spending that can benefit the economy, although temporarily.
Some challenges like the Current Account Deficit (CAD) and the rupee could remain as global crude oil prices remain at elevated levels and with a slowing global economy we don't have enough exports to balance-off our high imports. However, we feel in the medium term, foreign institutional investors (FIIs) will continue to stay invested in India as our long-term story still looks positive.
We feel markets could be range bound with the Nifty between 5,600 and 6,200 points and there is a good chance of a sideways consolidation till the end of general elections. In the end, long-term performance will come only if you get your short-term calls right.

Given your outlook, what will be your investment approach?
Whenever markets trend sideways with high volatility, it gives an opportunity to improve performance by increasing the churn on the portfolio. What we have done is to have a core portfolio that consists of good quality stocks and sectors that are not exposed to such a high volatility.
Our portfolio consists of stocks which are either growing or have very little downside like the pharma and consumer stocks. While some may ask why consumer stocks as they have rallied significantly in the past, I think there is an interesting story playing out; where the owners seem to have a bright outlook on their Indian subsidiaries with several MNCs coming out with open offers for increasing their stake at even higher valuations.
If one has to choose sectors and stocks from the benchmark, say BSE 100, then by sheer process of elimination one will eventually land up with a few sectors like IT, Pharma and Consumer. One will not want to hold metals as there is still a fear of global slowdown and excess inventory. Then again, one will stay away from auto sector which is also impacted by slowdown and competition.
Again, if one looks at the capex cycle and the IIP numbers every month, then we will have to stay away from sectors such as infrastructure, cement and power. So if you go step by step and eliminate such sectors, what remains is FMCG, Pharma and IT and these are the only sectors where we have some comfort. For us comfort has to be on two parameters, one is growth and the other is valuation.
Now, increasingly, we are reaching a situation where even FMCG and IT may get eliminated due to high valuations relative to growth. If the markets remain such, it will be hugely challenging for us to find good companies for the core portfolio. Our average number of stocks in the portfolio has already fallen from over 50 to around 40 in the Union KBC Equity Fund.

Besides the lock-in for three years, how is Union KBC Tax Saver different from Union KBC Equity?
While both the funds are run by the same team, the approach to portfolio construction is different. The equity fund is relatively more top-down while the Tax Saver is more bottom-up. Although from a sectoral allocation point of view, the portfolio of both Union KBC Tax Saver and Union KBC Equity might look similar, the composition is different because Union KBC Tax Saver also benefits from a longer term approach towards stock selection compared to the equity fund, which is relatively more benchmarked as we track the performance of the BSE 100 (benchmark for Union KBC Equity) on a regular basis. To give an example, you will find us overweight in sectors such as Banking and Pharma in both the portfolios but in tax saver we have managed to pick certain bottom-up stocks which have helped us a lot in the last one year, which are not a part of the equity fund portfolio. However, the broad principles for both the funds remain same -- we don't aggressively concentrate our portfolio in a few stocks.

How long is your mid-cap watchlist?
I would say in each of the sectors our analysts track at least 3-4 mid-caps, this is also because we intend to come out with a mid- and small-cap fund. We are already in the process of building a portfolio and since the past few months we are tracking a large number of mid-caps. But if you ask me to put a number, I would say that currently there are 20-25 stocks on our watchlist which we actively track and going forward this number would increase to around 50. The current situation doesn't allow us to diversify too much and it is better to remain focused at this point of time because there are a lot of companies which are not worth tracking right now.

What kind of stocks you don't touch at all?
Obviously there are many companies even in the benchmark which we don't want to touch as of now. Companies that have tremendous headwinds, balance sheet problems with huge debt on the books. So, take for example, we are underweight on PSU banks as we want to avoid them in the current situation. As we know the stress assets will eventually enter the books of such banks and prices could be impacted. But it also doesn't mean that we will never be overweight on PSU banks. Who knows one year down the line we would find excellent opportunity in PSU banks.
So I am trying to say that there is no hard and fast rule that we will be staying away from any stock or sector. For us it is a function of time as to which companies you want to stay away or which you want to invest.

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