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'Interest rates are close to peaking out'

Source : BUSINESS_STANDARD
Last Updated: Thu, Nov 17, 2011 20:42 hrs
​India gross loan portfolio

Since the beginning of Smart Portfolios' Season 4, the portfolios of the fund managers have undergone major fluctuations and extreme makeovers, depending on the course markets have been taking. As of this week, the net worth of all the fund managers has fallen below the Rs 10,00,000-mark. Rikesh Parikh's net worth totals Rs 9,76,000, down 2.38 per cent; Mehraboon Irani's net worth is valued at Rs 8,97,000, down 10.34 per cent; Ashish Mittal's net worth stands at Rs 9,58,000, down 4.16 per cent; and Alex Mathews' net worth is at Rs 9,94,000, down 0.6 per cent. Meanwhile, Smart Portfolio's benchmark index, S&P CNX 500, has shed nearly five per cent so far.

Cartoon: This is all that Vijay Mallya really wants

For the week, Shilpa Johnson spoke to Ajay Parmar, co-head, investment banking, Emkay Global. Parmar's net worth is valued at Rs 9,94,000, down 0.64 per cent. Commenting on the status quo of markets and his investment strategy, Parmar stated, "The current market is volatile and identifying a good investment opportunity really requires a thorough study of the economy, relevant industry and a detailed analysis of the company itself. In short, we need to undertake macro, as well as micro analysis."

What is your view on the macroeconomic headwinds India is facing? Which industry/sector will give the best returns?
Interest rates are close to peaking out after the last 25 basis points (bps) increase by the Reserve Bank of India (RBI). However, another 25 bps increase in the rates cannot be ruled out. Further pain can be expected in markets and these factors may cause the general slowdown in the economy to continue.

The rupee has also depreciated against the dollar. In this scenario, information technology (IT) companies will be the net beneficiaries. In the mid-cap space, companies with better growth rates, such as Hexaware and Patni Computer, look good, with the latter also having a potential delisting benefit.

There will be pressure on almost all industries and sectors due to the slowdown, including the banking sector. However, once the interest rate cycle reverses (this can happen in six months), banking stocks can give better returns. From the long-term perspective, one can start investing in small quantities in advance, as the valuations are quite compelling.

Advocates of the bottom-up approach simply seek strong companies with good prospects, regardless of industry or macroeconomic factors. What do you think constitute good prospects?
A good prospect means a better industry position than others, better sustainable margins than the peers, may be more innovative manufacturing process or marketing ability; in short, having a strong competitive advantage as compared to the peers. All these will keep the company in a good shape even in an adverse scenario and, hence, make it a good investment.

The irresponsible Vijay Mallya

Top-down and bottom-up researches are vastly different ways of looking at stocks. How do you manage to find stocks that fit the requirements of both kinds of research?
A top-down approach enables us to identify a theme, and on this basis, one can identify a set of companies. For example, in a weaker rupee environment, companies with net export income should do well. With this premise, one can select the IT sector and within the sector, select a few stocks to invest in. One can also set a minimum benchmark of return on equity (ROE) and return on capital employed (ROCE), and set a criterion of selecting only companies that have ROCE and ROE of 25 per cent or more in 2010-11. This will throw a list of companies that one can analyse and select the best out of the list.Similarly, there are bottom-up ideas like the cable company Den Networks – a story based on changes in the industry scenario from analogue cable to compulsory digital cable.

What is your opinion about mid-cap stocks? How do you expect this space to pan out?
I expect mid-caps to undergo a lot of panic, which is why I sold a number of stocks from the mid-cap space. Uncertainty in markets has increased to new levels in the past few weeks.

Last week, I let go of most of the banking stocks in my portfolio, as I expected the sector to be under pressure. I was basically ahead of markets; hence, I was able to book profits on having sold off the banking stocks.


For Smart Portfolios, please visit www.smartinvestor.in



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