Stock markets have again started surging, but investors continue to remain cautious. Sunil Singhania, head of equity at Reliance Mutual Fund, in a conversation with Chandan Kishore Kant, says investors should not miss the bus yet again and must use the current opportunity to start investing, as the situation would look much better six months down the line. Edited excerpts:
What's your reading of the current movement in equity markets?
We are seeing renewed optimism from investors globally and to some extent locally. Our internal perspective is that there are challenges, as we have problems of inflation, interest rates, governance, Euro zone crisis and currency, among others. But, everyone knows about this, as these have been highlighted multiple times. Equity markets discount the future, not the past.
After six months, whether inflation be higher or lower, people differ in their views, but there is no dispute that it will be lower than today. So, too, on whether RBI (Reserve Bank of India) will cut rates by half a per cent, or two per cent. There are differences in arguments, but again all agree it's going to be lower than what it is today.
Similarly, on policy action, people may differ that it could be aggressive or muted, but there will be some action. So, on all parameters, six months down the line, the situation would look much better than what it is today.
What strategies do you have for your investment-making decisions?
In these difficult market situations, the best thing is to move to safety. And that's what has happened. Across portfolios, everyone has chosen safety and are paying a high valuation for that. So, right now, you feel those stocks are safe, but you are paying a very high price for that. Our view is, yes, it makes sense to move to safety.
Now, if we need to bank on the India growth story, start looking at stocks that might not be 100 per cent safe, but the ones that give higher risk return opportunity. Very clearly, our focus is to identify those stocks where the risk-return profile is better than only safety.
Are you giving signals that it's enough of being defensive now?
FMCG (fast-moving consumer goods) stocks have done phenomenally well. But, at valuations of 35x, whether I should buy it or wait? Our call is, we should look at other sectors, which might be better in the near-term and then, we can come back to FMCG, when the valuations are little bit in our favour. We are underweight on FMCG. We would rather play pharma because valuations are in our favour, growth is faster and currency is helping the sector.
What about the banking and telecom sectors?
We would rather play some of the larger names in the banking space. Problems surrounding non-performing assets (NPA) can hit the smaller banks more than the larger banks.
One big account for a large bank will be a small portion of their debt exposure, but for small banks it will be large.
Further, telecom is going through a lot of headwinds, but our view is that it's a very interesting sector. We are closely tracking it as a regulatory framework unfolds, but we would like to see the regulatory environment playing out fully.
Market participants are of the view that the next bull run would be one of the strongest. Do you agree?
Our economy took 60 years to reach a trillion dollar size. We are already a $1.5 trillion economy. In the next 15 years, depending on the growth rate, you presume we should be a $5-6 trillion economy.
If you see the past, the market-cap keeps pace with the economy, so there is no doubt as the economy grows, the market-cap will grow and that will be reflected in the strength of benchmark indices.
We are definitely going to see new highs, because it is linked to the economic growth. But, whether this happens this year, next year or two years later, is difficult to say. But we are positive that investments in equities in India are going to give decent returns.
Looking at the current equity market situation, what would be your advice to investors?
There are challenges, no doubt about it. But, we have a call that necessary action would happen.
If one has some doubts, do not invest the full amount, but at least start investing and if investors are under-invested, one should straight away put 25-30 per cent of the amount and scale it up in the coming months as clarity emerges. The equity allocation for investors has never been so low. In fact, retail investors have moved out Rs 50,000 crore out of the equity markets over the last three-four years. And rightly so, as markets have not been doing good. Last December was the worst time for the economy, and after that we had only bad news. We still do not have very good news, but still, markets are 15 per cent higher than those levels
Is thought process for investment becoming very important in current volatile phase?
Unfortunately, after 2008, for a variety of reasons that are not necessarily fundamental, investors have not seen consistent returns from the equity markets. And that has led them to raise questions on the efficacy of investments in equity. So, when we say thought process and when we say consistency, we are trying to communicate to the investor that sometimes markets might not necessarily move on fundamentals. There are other factors that will keep influencing the markets in the near-term and if your thought process, your way of investments and if your consistency are maintained, investors will definitely make higher returns in the equity markets.
Why do you say so? Is investors' behaviour becoming troublesome?
In equity, investors expect 100 per cent return every year. The expectations have to be reasonable. In other asset classes, this sort of expectation is not there. Moreover, investors have started looking at mutual funds on a daily, weekly and monthly basis, which they should not. I think, before investment, they should be clear of which fund houses and which schemes they are investing in. I think the due-diligence should go there. And then, as is the case with every other investments, you give time to ensure consistency. As long as your asset allocation is perfect, one per cent performance up or down should not be a concern. Logically, it should be at lest three years. But, the last three-four years have been like once-in-a-life-time kind of a period, where everything which could go wrong has gone wrong.