As the fifth season of Smart Portfolio draws to a close, Naveen Fernandes, fund manager, Centrum Wealth, talks to Jinsy Mathew about how he reads the current market conditions. He also outlines his investment strategy. Edited excerpts:
What do you think about the current market turmoil?
The market turmoil has been fuelled by unfounded fears of an end to global liquidity (withdrawal of the third round of quantitative easing by the US Federal Reserve) and a crash in the rupee's exchange rate. The end to liquidity, in our view, would be accompanied by an improvement in the economic growth of the developed world, which isn't bad for emerging economies such as India in the medium to long term. We believe owing to the recent measures on gold imports, these have already fallen about 60 per cent, compared to the second week of June. This would significantly improve the current account balance and, therefore, the value of the rupee.
At the beginning of the year, you had suggested a buy-on-dips and a bottom-up approach. Does that still hold, or would you change your stance now?
The expected normal monsoon, headline inflation remaining below five per cent, retail inflation hitting a 15-month low, possible support from domestic institutional investors (who have sold equities worth about Rs 1 lakh crore) and, most importantly, the appealing valuation of the markets (Sensex available at 12 PE on one-year forward earnings) and a large number of individual stocks available at throwaway valuations continue to provide confidence in Indian equities. In our view, irrespective of the movement of benchmark indices, individual stock approaches would help investors to create wealth in the long term. Therefore, we maintain our stance. A vast majority of your portfolio comprises mid-cap stocks. Are you concerned about large-cap valuations?
Yes, we are concerned about the valuations of some large-cap stocks such as some stocks in the pharmaceutical and fast-moving consumer goods sectors quoting more than 100 per cent premium to valuations of the Sensex/Nifty. It is time to increase focus on good-value mid-cap stocks, especially those that give very high dividend yields in the current environment. What is your outlook on the market for the rest of this year? Which sectors should one focus on?
We believe the markets would be a little volatile, owing to the possible announcement of general elections by the end of the year and the progress of the monsoon till September. We suggest efficient private banks, owing to expectations of a continued reversal of the interest rate cycle and many beaten-down stocks of multinational companies (MNCs). While the rupee has fallen about 30 per cent through the last two years, many individual MNC stocks have fallen 10-45 per cent in the last one year. These developments increase the possibility of parent companies of some of these MNCs opting to delist or increase stake to 75 per cent.
We focus on high dividend yield stocks, most efficient and least leveraged sugar stocks (as the sugar cycle is set for a turnaround, with soaring cane arrears and an expected fall in output), information technology stocks and net exporters and import substitutes in the manufacturing space, as well as the least leveraged or cash-rich capital goods companies. So far, MRF has been the best pick, with 36 per cent returns. What was your investment strategy?
MRF has strong brand equity. It is a leader in the tyre segment and at Rs 13,000 crore, it is the only tyre company with sales exceeding Rs 10,000 crore. Its secondary market sales stand at 76 per cent, shielding it from the slowdown in the automobile industry. The valuations are attractive and MRF is the biggest gainer from the 25 per cent drop in natural rubber prices, compared to the year-ago peak. Any possible corporate action, in terms of bonus or a split, would improve liquidity and, therefore, lead to substantial valuation.