Indian equity markets are on the verge of touching an all-time high but Ritesh Jain, CIO at Tata AMC, believes that markets are not fully pricing the growth and earning slowdown.
What is your outlook for fixed income?
While government bond yields have eased after the recent announcement by the Reserve Bank of India (RBI), the overall macro environment remains unsupportive. Corporate balance sheets are stretched and we expect corporate bond spreads to widen as funding stress becomes more pronounced. This is primarily because of the inability of banking balance sheets to continue to support corporate India anymore. While public sector banks don't have the capital to lend to corporates, private banks, while having the ability to lend, are increasingly becoming cautious on lending to lower-rated credits to avoid further stress on their balance sheets. Given this scenario, we are focusing on higher-rated corporate papers and opportunistically investing in government bonds. Going forward, market movements will be decided by the Fed and tapering of QE. For the Indian rupee to stabilise, we don't need half-hearted measures to deal with the current account deficit (CAD). We need to solve the CAD strongly and probably the easiest way to get back market confidence in the short term is a one-time hike in diesel prices by Rs 5.
Given the current situation, what tactical changes have you made of late in your portfolios--in both equity and debt?
In equity, we are underweight on banking as we strongly believe that the worst is still not behind us as the NPA cycle is yet to play out. We have increased our exposure in IT, pharma, telecom and media. On the debt side, we would prefer not to have any commodity companies or below AA+ rated papers. We believe it is not the opportune time to go down the credit curve. If GDP growth is at 9 per cent, the probability of defaults is lower, but at 5 per cent, GDP growth borrowers may default as they don't get capital to fund their business. We want to have a completely liquid portfolio which can be liquidated in a short period of time. I would invest more in 10-year government bonds, AAA rated papers of PSUs and stay away from NBFCs and lower-rated corporate papers.
In near future, what are the policy actions you expect from the RBI?
We believe that they should allow the currency to find its way and with inflation rising, they should further hike the interest rates. But if they back off from raising rates then we might again see real interest rates turning negative. This in turn will lead to money flowing back into gold and real estate. So the RBI is stuck between a rock and a hard place. I also believe that in terms of policy action in India, US and Fed remain the deciding factor. We should understand that flows are going back to developed markets from emerging markets. No matter how attractive the returns here, the pool of money chasing emerging markets (EMs) will come down and foreign investors will become more selective than before and will buy only the best managed companies. I think the only way out is to allow deposit rates to remain at double digits for the next couple of years and let growth take some hit. This exercise will lead to a fall in CAD and people will have more financial and less physical savings which will automatically shrink our CAD. Allow growth numbers to come to pre-1991 era for a couple of years to build savings so that we can come back strongly. Else, if we again try to keep the real interest rates negative, the bubble will get bigger and later burst with bigger side effects than what we are seeing today.
What is your framework taking a duration call today?
The interest rate environment remains hazy and we expect markets to remain volatile in the near term. The heightened volatility requires agility with tactical exposure. We were underweight on duration till couple of months back but took opportunity of the extreme movement in the bond markets by adding duration exposure when the 10Y GOI benchmark yields moved up above 9 per cent. We will continue to remain tactical, focusing on capturing short term trading opportunities for now.
What is your framework for taking a credit call today? What kind of credit risk you don't take at all? We believe it is not the right environment to add credit risk below AA at this point of time. Liquidity for us is of paramount importance at this point of time. We are therefore focusing on investing in government bonds/treasury bills, AAA rated papers of public sector undertaking (PSUs) and staying clear of non-banking financial company (NBFCs) and lower rated corporate papers.
What advice would you give to an investor from a short term as well as a long term perspective?
Given the existing environment, investors should look at investing in short term bond funds and fixed maturity plans (FMPs). For equity, investors should look to invest through SIPs over the next five years. The next two years are likely to remain unpleasant for the economy but once we have addressed the systemic issues, equity markets have enough opportunity for investors.
What is your outlook on the equity markets for rest of 2013?
While the markets have rallied sharply in the last few trading sessions, they are not fully pricing the growth and earning slowdown. Probably, the mid cap segment which has taken a severe beating over the last 6 months indicates a more telling story of the real economy. Leading indices are not showing the real slowdown because FMCG, Pharma and IT are still holding on but we believe that the slowdown will percolate down to the FMCG sector also as domestic demand moderates.
Overall, polarisation in markets is expected to continue with sector and stock rotations expected to continue to present investment opportunities. Companies which have gone through cost rationalisation have strong cash position, earning's visibility and leaner balancesheets, and are expected to remain in market focus.
What key factors can change the current complexion of the markets?
The biggest positive trigger for markets in the near term will be moderation in oil prices, further slowdown in gold imports and resultant reduction in CAD and trade deficit numbers which in turn will support rupee. A good monsoon has increased expectations of a positive impact on the disposable income of rural India. We believe that these positive developments would sustain consumption demand. Additionally, higher agricultural growth is expected to have a multiplier effect for overall GDP growth. Presently, the RBI is focusing on external risks and growth has taken a back seat. If rupee shows signs of stabilisation within the RBI's comfort zone, we expect the attention to shift back to growth over medium term.
Tell us about your investment approach?
We are biased towards large cap stocks which have relatively better earnings visibility and resilience. Currently, liquidity is extremely important and large cap stocks have that added advantage in terms of liquidity. Among sectors, we are overweight on technology, pharma, media and telecom. Companies from these sectors are showing good revenue traction with better sector fundamentals. We are underweight on metals, capital goods, FMCG and banks.
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