While the markets have cheered the recent policy initiatives and key economic developments, there has been a steady rise in the closure of equity fund folios in 2012. Sanjay Sachdev, president and chief executive officer of Tata Mutual Fund, says investors need a sustained rally in equities for the confidence to return. Also, he tells Puneet Wadhwa, a reduction in interest rates would give a boost to investment in equities. Edited excerpts:
How do you see the markets from here on? What would be the worst-case scenario if there are early elections?
Political uncertainty exists. However, recent moves by the European Central Bank and the US Fed have substantially reduced the risk premium for equity investors across the globe. Thus, the liquidity generated by central banks in developed markets is likely to find shelter in emerging market (EM) equity.
Within EMs, India has an advantage over China, as the Chinese economy is slowing. Also, in India, the recent policy announcements have not been rolled back. This, coupled with a strong pick-up in the monsoon in August and September, considerably reduced the downside risk to gross domestic product (GDP) growth rates. Thus, political uncertainty alone would have a limited impact on equity markets, if global liquidity and growth scenarios remain at current levels.
Would the focus shift to developments at the domestic level, compared to what is happening globally?
It would be wrong to say domestic developments did not impact Indian equity markets earlier. In fact, India’s relative underperformance in calendar year (CY) 2011, compared to other EMs, was partly due to its domestic developments such as low investments and high fiscal and current account deficits.
The government’s recent policy initiatives suggest policy is moving in the right direction. If we continue to take rational economic decisions and improve the share of investment in our GDP, our markets will be less impacted by global events.
What are your earnings estimates for India Inc for FY13 and FY14? Have the overall estimates and any sectors in particular seen an upward/downward revision?
We expect the Sensex EPS (earnings per share) to be Rs 1,210 for FY13 and Rs 1,385 for FY14, growth of about 14.5 per cent in FY14 over FY13. The important thing is the pace of EPS downgrades, very high till March 2012, has significantly come off. Thus, the downgrade cycle is bottoming.
For FY14, we feel secular growth sectors such as financial, consumer and pharma will continue to have decent growth. We can see a strong bounceback in growth in interest rate-sensitive sectors such as automobiles and consumer discretionary. Also, if the policy environment improves further, we can see upgrades in earnings.
The last time we spoke, in May, you were underweight on public sector banks, global cyclicals such as metals and refining, and petchem. How has this strategy paid off and has this view changed?
We are still underweight on global cyclicals such as metals and refining and petchem. We feel global growth in CY13/FY14 will be more muted. Our key overweights are auto and auto ancillaries, media and pharma. In other sectors, we are more neutral and prefer a more stock-specific approach.
Stocks of the cement, pharmaceuticals and fast-moving consumer goods (FMCG) sectors seem to defy gravity. What is your call on these three?
Cement has seen strong earnings growth, with both volume and margins improving. If the investment cycle picks up, cement will be a beneficiary. Pharma and FMCG are secular growth sectors, with high ROE (return on equity) and healthy cash generation. Their valuations are unlikely to come down in a hurry. For the pharma sector, however, the pricing policy in domestic markets can be a near-term headwind.
The market has rallied since September and overall investor sentiment seems to be improving. Would this arrest the fall in equity fund folios and ease redemption pressure?
Investors are looking at the current market rally as a profit booking opportunity, evident from the industry’s loss of folio figures in the past couple of months. However, as observed historically, a sustained rally in equities instills confidence in retail investors to come back to the markets. A reduction in interest rates in the economy will give a boost to investment in equities.
What is your view on growth prospects for mutual funds, considering the recent policy measures announced?
The recent measures will prove a watershed moment for MFs. The size of the sector in terms of investor folios is abysmal as compared to the potential. The policy announcements are in the direction of addressing these issues by way of geographical market penetration beyond the top 15 cities and the thrust on investor education. There is no reason to believe the MF sector in India cannot grow manifold, with a large savings rate and perhaps the best demographic configuration in the world at this point in time.