Indian funds have beaten Warren Buffett in returns, says Nilesh Shah

Indian investors are still in reverse track, Nilesh Shah tells ET Wealth. The good news is a more mature set of investors has entered the market in recent years.

A recent report says most actively managed mutual funds underperformed their benchmarks in the past five years. What are your observations?

Nilesh Shah: There's a saying that if you torture data enough, it will confess to everything. The SPIVA report is nothing but torturing of data. They have failed to appreciate that the worst performing Indian mutual fund outperformed Warren Buffett in dollar terms by over four times in the past 17 years. They also failed to appreciate that Indian equity fund managers outperformed the benchmark indices by double the margin by which Buffett outperformed indices in past 17 years. So we are outperforming the God himself, but you are torturing data to represent something that is untrue. All I can say is, please don't denigrate us and represent data to get sensational headlines.

You think all mutual funds have done their job well?

Nilesh Shah: As a mutual fund house, our job is to ensure that we take proper care of our clients' money. This could be in terms of outperforming the benchmark indices of the respective schemes. Fund managers are also human. They also make errors. If they keep on repeating those errors, there is cause for concern. In 2000, a lot of fund managers went wrong in picking companies. In 2008, a lot of us went wrong on the valuations. But at least the mistake of picking the wrong companies was avoided.

Equity funds have given good returns in the past 10-15 years. Why are investors still staying away?

Nilesh Shah: Indian investors were 45% owners of Indian equity in the early 1990s. Today, they own only 9-10%. While the market cap of Indian companies has soared, the Indian public has just sold off its stake. There are lots of Indian companies run by excellent entrepreneurs and managers. These people work hard but the fruits of their hard work are enjoyed more in Singapore, Hong Kong, London and New York, rather than in Ahmedabad, Bengaluru, Mumbai and Delhi. Indian companies are progressing but Indian investors are still in reverse track. If Indian investors had not sold off, HDFC and other great companies would still be Indian-owned.

Some portion of the EPF corpus will now be invested in stocks. What do you think of the development?

Nilesh Shah: It is a positive move. The investment philosophy followed by the EPFO for the past several decades has led to poor returns for investors. There are millions of subscribers who have been contributing to it for the past 15-20 years. By not investing in equities, they have remained poor. Imagine how much richer they could have been if some portion of their PF balance was allocated to equities 15-20 years ago.

Do you think equity fund investors in India have matured in the past 10-15 years?

Nilesh Shah: On one hand, there are investors who are happy with a reasonable return that beats the broader market. On the other hand there are investors who want to double their money in a very short time. They think that since fund managers appear on TV and other media, they are gurus. If a fund manager could predict with certainty where the market was headed, why would he work? A fund manager is not a wizard, he doesn't have a magic wand like Harry Potter. However, a more mature set of investors is now emerging. They are not too upset when markets don't do well. They understand that the downturn is transitional and try to gain from it by buying more at low prices. A growing number of investors is also realising the benefits of regular and longterm investing. There are 78 lakh SIP investors in funds today. We pray they continue and reap benefits of systematic investments in equities.

Source: http://economictimes.indiatimes.com/opinion/interviews/indian-funds-have-beaten-warren-buffett-in-returns-says-nilesh-shah/articleshow/47395888.cms

Fund managers see range of 16,000-18,700 for Sensex by Mar 12

``Most of the fund managers expect the Indian equity markets to be in the range of 16,000-18,700 by the end of March 2012,`` according to ICICIdirect Fund Managers Survey.

``Earnings growth expectations have been revised downwards both for the current as well as the next fiscal year. Although most of them believe that valuations are more reasonable, a majority of them are cautious in the short-term,`` it added.

``A majority of the fund managers believe that allocation towards equity markets at current levels should be increased with an investment horizon of one year and above. Due to current higher yields and expectations of overall interest rates coming down in 2012, the Indian debt markets remain the most preferred asset class,`` it further added. 

ICICI Securities in its Fund Managers Survey has covered 16 domestic fund managers from the mutual fund industry. The Fund Manager Survey is conducted on a quarterly basis. The previous survey was done in August 2011. 

Equity Markets

Where do you expect BSE Sensex at the end of March 2012?

Total 75% of the fund managers do not expect major downsides for the markets from current levels and do not expect the market to be below 16,000 levels by the end of March 2012. Half of the fund managers surveyed believes the market will be in the range of +/-5% from current levels till the end of the current fiscal year FY11-12.

Where will you broadly position the Indian equity market on a valuation scale?

Most of the fund managers continue to believe that the markets are fairly valued while none believe it to be overvalued. As compared to the last survey, a higher percentage of fund managers believe that the markets are undervalued.

What is your broad outlook for the markets in the next three months?

There has been a marginal increase in optimism where 19% of the fund managers are bullish towards the overall market as compared to 13% in the last survey. Majority of them remain neutral in the short-term.

Compared to the previous three months, are you more confident about investment in the equity market?

Most of the fund managers are now less confident towards equity market investment as compared to the previous survey. The number of fund managers who are cautious toward equity markets have increased from 30% to 50%.

What could be the major global risk for Indian markets?

According to most of the respondents, the European sovereign crises are a major cause of concern for Indian equity markets. Higher crude oil prices also remain a major risk.

What is your corporate earnings growth expectation for FY11-12 and FY12-13?

Earnings growth expectations have been revised downwards by the fund managers for both FY12 as well as FY 13. Earnings growth for the current as well as next year has been revised down to less than 10% by a most of the fund managers while the outlook seems incrementally better for the year FY12-13 with higher number of them believes growth to be in 10-15%.

Which segment of the market would you prefer with an investment horizon of one year?

Preference toward large caps has increased due to increased volatility. However, midcaps also remain preferred for many of the fund managers due to attractive valuations.

Rank the sector according to your preference..

FMCG and pharma sectors continue to be the most preferred sectors. Preference for both sectors has, in  fact, increased as compared to the previous survey. IT sector has again found favour among the fund managers. Selective stocks in Infra/Capital goods sector have also seen increase in preference.  Sectors that have seen a decrease in preference as compared to the previous survey includes BFSI, auto, oil & gas, telecom and metals.

Debt Markets

Where do you benchmark the 10 year G-Sec yield in three months?

Total 75% of the fund managers expect the 10 year benchmark G-sec yield to be in the 8.50-9% range. Select few of them believe the yields will be above 9%.

With a six months horizon, which segment of the debt market do you expect to deliver better returns?

Short-term debt funds remain the most preferred segment due to elevated short-term rates and better risk-return trade-off. Many of the fund managers were more optimistic towards G-sec funds due to a sharp rise in yields. 

Investment Strategy

Which asset class do you think will outperform in the rest of the year 2012?

Opinion seems to be divided over the asset that will outperform in the year 2012. While debt markets Due  to current higher yields and expectations of overall interest rates coming down  in 2012, the outlook for Indian debt markets remain positive. Range bound with volatility on global news flows is the verdict for the equity markets. Most of the fund managers advise a buying on dips strategy for the equity markets.

What equity market strategy would you suggest now?

With valuations more reasonable, most of the fund managers believe allocation should be either maintained or increased towards equity markets. However, as compared to the previous survey, less percentage of them advise to increase allocation at current levels.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20111207110904043&dir=2011/12/07

Can other asset classes outperform the equity market over the long haul?

The volatility in equities, both local and global, has prompted many investors to exit equities and shift to other asset classes such as gold and commodities. But is this a desirable shift? Can other asset classes outperform the equity market over the long haul?

In this edition of the ET Investor's Guide Quarterly Mutual Fund Tracker, our panel of experts provides a perspective on the state of the market and their views on other asset classes, in interviews with ET.

QUESTIONS
Q1: Where is the Indian equity market headed given the current global uncertainties?

Q2: How will equity investments fare as an asset class?

Q3: How will the global equity market perform?

Q4: Will gold as an asset class outperform?

Q5: Will real estate investments pay off?

Q6: Is commodity investment a sensible option?

Q7: How much should an investor set aside for personal investment?

ANSWERS

SANDESH KIRKIRE, Chief Executive Officer, Kotak Mahindra Asset Management

1. We have seen these similar market levels in 2007 last quarter. But if you see the valuations, the market is much cheaper today. The domestic consumption part of the economy is doing well. What, however, is not doing well is domestic investment, especially in the infrastructure space.

And a lot of reasons can be blamed for it - policy paralysis, high interest rates resulting in corporate India going slow with projects etc. But from a retail investors' perspective, these are the times one should be looking at for investing for a long period.

2. Buying equity means buying ownership of the company and for an owner shortterm hiccups should not be a great botheration. If investors look at the performance of systematic investing in equity MFs over 8-10 year period, huge wealth has been created. Investors should look at that kind of a time frame. If you do not have that kind of an investment horizon, you should not be looking at equity.

3. One needs to select a right market to invest. Developed markets struggle to outperform the emerging ones. India is one of the fastest-growing economies. So I guess majority of investment should be centred here. But some exposure can be taken in the international markets.

4. Gold as a commodity has no use other than hedging. Unlike other commodities, it has no commercial usage. One cannot put a lot of money in gold but some investment is desired as gold is a hedge to global financial markets.

5. Real Estate is not accessable to a retail investor. You have real estate funds that are not retail in nature. As far as physical purchase is concerned, it is difficult to transact in property. I am not sure if real estate is a viable investment option for a retail investor. If one is buying for capital appreciation, firstly it is difficult to liquidate and secondly this asset class may not see growth for a long time.

6. Commodities are purely leverage. When one is buying commodities, one is buying future. The impact on correction is massive. It's like borrowing money to play in the market. I don't think a retail investor should even think about it. Commodity prices are influenced by something happening in some part of the globe. To illustrate, oil demand has gone up 3% from October 2008 till date but oil prices are up 300%. This financialisation of commodities market is harmful.

7. About 50-60% of my portfolio is allocated to Indian equities while 35-40% is in fixed income products that include bank deposits. Investment in gold would be around 5%.

SHANKARAN NAREN, Chief Investment Officer, ICICI Prudential Asset Management

1. The market will be volatile due to the events in Europe. As far as the domestic economy is concerned, the monsoon has been the single biggest positive phenomenon, which has helped agricultural production. But high crude oil prices are clearly a negative for the economy. The direct tax collections have also been disappointing. As far as inflation is concerned, our guess is that the worst is over and the rates should move southwards by March 12.

2. Valuations are pretty attractive in the domestic market today. This is a good opportunity for investor to increase their allocation to equity systematically though SIPs and STPs. Overall investment trend in India shows that Indian investors are grossly under invested in equities vis-a-vis other asset classes.

3. In a volatile scenario, the more number of asset classes one has diversified the finances into, the better. Certainly, one should allocate investment in both domestic as well as international markets. This will give you a different pay off.

4. Gold is an asset class, which does well when global economies get into trouble and poorly when globally economies are fairing better. Although it is not a very new asset class for Indians, a view on this asset, for investment allocation is not very easy.

5. Real estate as an asset class is for the affluent. The prices are off the roof not only in the metros but also in the other smaller cities making this asset out of bound for most investors. My guess is that retail investors should look at equities as an investment avenue instead.

Having not delivered in the past four years, valuations in the equity market have become quite attractive. Alternatively, they can also look at fixed income instruments, at least till the time the interest rates begin to cool off.

6. It is difficult to comment on commodities as a pure asset class though we do invest in stocks of companies related to commodities.

7. Equity, both domestic and international, form the core of my investment portfolio followed by fixed income products. I do not invest in real estate and gold. Moreover, being unsure of commodities as an asset class, I have kept myself far away from it.

ASHU SUYASH, Country Head & Managing Director, India, Fidelity Worldwide Investments

1. The markets will be range bound for a while. But what is important here is that we do not anticipate any 2008 like downfall and this gives a lot of opportunities to the investors to invest provided they can stomach the volatility.

2. Clearly you cannot expect 60-70% kind of returns that you had after the recovery, but if you had to look at beating the inflation, which itself is 9%, no guaranteed fixed return product adjusted for tax is going to give a positive upside. Taking that into account, the mindset needs to take on board certain risk. And if one is ready to take on board this risk and volatility, equities are still appealing.

3. You cannot put everything in India nor all in the international market. Last year India was among one of the best performing markets, today it is among one of the worst performers. FIIs are optimistic on emerging markets and not only India. India's economic growth rates are very high today but the base is small compared to the US. Developed economies with large base and slow growth rate are not as volatile as we are. International equities can thus be considered for diversification.

4. Today everybody is willing to invest in gold without giving a thought that how soon are we going to see a similar rise. Gold deserves some allocation but one cannot go overboard investing in gold. While gold has outperformed, it has not outperformed equities over a longer haul. Investment in gold is a flight to safety and not to generate wealth.

5. Real estate for me is the necessity to own a house. Beyond that, I think there is nothing like mark to market in real estate because it is one of the most opaque markets and very difficult to liquidate in times of need. So, the big gains that we see on property will be of no use if one really needs the money but is unable to sell the property.

Unfortunately there are not enough liquid financial asset classes linked to real estate. So while real estate does deserve merit in the overall net worth of the investor, but beyond that I would personally worry if I had to put my retirement money in a house.

6. I doubt if retail investors in our country really understands commodity as an asset class. One should not invest in something one is unsure about and where you neither have historical data nor forecasts.

7. I am predominantly a mutual fund person. The largest allocation of my portfolio goes to equity mutual funds, including some offshore products available in India. For fixed income, I have a roughly even allocation to cash funds and bank deposits and a small percentage allocated to gold.

 NAVNEET MUNOT, Chief Investment Officer, SBI Asset Management

1. The equity market is expected to remain volatile on account of the events in the euro zone as well as the macro economic headwinds in the domestic market. However, while markets will continue to be range-bound, the valuations currently are fairly attractive for longterm investment point of view.

2. Given the kind of volatility, overall allocation to equities has gone down over the past couple of months in favour of other asset classes like gold, real estate and fixed income. Investors, however, should use the current volatility to their advantage and build their equity portfolios, as valuations are extremely attractive.

3. For retail investors, given the longterm opportunity in India, the focus should be domestic market. However, high net worth individuals, who have a larger portfolio and need to diversify to different geographies can invest 5-10% of their portfolio in international equity market.

4. It would be foolish to look at Gold as an investment option for absolute returns now since it has seen a lot of run-up already. However, one may use it as a hedge in their portfolio against any major turmoil in the capital market. So in my view, an allocation of 4-8% should more than suffice.

5. It's difficult to generalise on investment in real estate. It depends on many parameters like the location of the property. Moreover, liquidity is always an issue with this asset class. Notwithstanding the fact that real estate has witnessed a lot of capital appreciation over the past few years, it is nevertheless a difficult and inconvenient investment option.

6. Commodity as an asset class is a good investment. However, being cyclical in nature, it makes sense for a retail investor to invest only if he or she closely tracks its movement. Another issue with investing in commodities is the absence of easy accessibility. Except for Gold ETFs, we do not have good vehicles to facilitate transaction in commodities.

7. Nearly 50% of my savings go to equities and a major chunk of the rest to fixed-income products. Gold is only for hedging and I allocate roughly 2-4% to this asset class.

Source: http://economictimes.indiatimes.com/articleshow/10706341.cms?prtpage=1

G-sec Bond yields are expected to remain volatile on external factors coupled with domestic economic data and supply concerns

Commenting on the Mid Quarter Review of Monetary Policy, Shobit Gupta, Head Fixed Income, Principal Mutual Fund said, “Along expected lines, RBI raised Repo and Reverse Repo rates by 25 basis in continuation with its anti-inflationary stance while further reiterating concern on persistent high domestic inflation. RBI acknowledged some slowdown in certain sectors but sees no evidence of any sharp or broad based slowdown alleviating some concerns on the growth front.

On the backdrop of recent economic numbers and moderation in commodity prices, we would expect RBI to tone down stance on the growth front but with the pass through of fuel prices and fiscal pressures, it is expected to continue hiking rates by another 50 basis in the remaining FY 12. Government Bond yields are expected to remain volatile on external factors coupled with domestic economic data and supply concerns while money market conditions are expected to remain stable on balanced liquidity conditions.”

Source: http://www.adityabirlamoney.com/news/485479/10/22,24/Mutual-Funds-Reports/G-sec-Bond-yields-are-expected-to-remain-volatile-on-external-factors-coupled-with-domestic-economic-data-and-supply-concerns

Investor friendly

“If you want to understand the investor pulse, travel by Mumbai’s evening local trains.” That’s a statement that Nilesh Shah, the deputy managing director at ICICI Prudential Mutual Fund, often makes.

But Shah is the kind of man that walks the talk — or in this case rides it: Many recall him actually travelling by a local train when he headed fixed-income funds at Franklin Templeton to hear people’s take on the markets.

Shah is just as involved in issues that impact the MF industry as a whole. During the liquidity squeeze of October 2008, following the collapse of US financial services giant Lehman Brothers, the degree and pace at which investors withdrew money from financial instruments was so staggering, it shoved the domestic MF industry to verge of a collapse.

Shah then took the lead in convincing Reserve Bank of India to lend the industry a helping hand. For the first time on October 14 that year, RBI introduced a Rs 20,000-crore, 14-day credit window for fund houses. Shah's efforts at reasoning with the Securities & Exchange Board of India paid off, too.

Though not an effective stock picker, consistency and steady bets have been Shah’s mantra. This may not have resulted in high-yielding gains for his investors, but their losses too were contained. “I believe in protecting the downside for investors,” he says.

Usually soft-spoken, the 42-year-old fund manager is a much sought-after speaker. Though rarely annoyed at the volley of questions at these functions, on one occasion he asked a member of his audience to shut up. “People have come to hear me and not you,” he had said, snubbing the gentleman.

ICICI’s assets under management have risen to over Rs 70,000 crore in September, from around Rs 15,000 crore when Shah joined the fund house as a chief investment officer in June 2004. ICICI's Discovery, Dynamic and Infrastructure schemes under his watch have delivered higher-than-average returns in the past 3-5 years.

When Shah put in his papers last week, citing “personal reasons”, the industry was curious what he had planned next. His exit comes at a time when MFs are yet again grappling with the regulator on various issues.

Source: http://www.business-standard.com/taketwo/news/investor-friendly/419261/

We see financials as one of most promising sectors: Krishna Sanghvi

Krishna Sanghvi, Head of Equities, Kotak AMC in an exclusive interview with Harsha Jethmalani of Myiris.com, spoke about performance of his funds, FII inflow, sectors likely to emerge as star performers, etc.

Krishna Sanghvi joined the Kotak group in May 1997 in the Auto Finance subsidiary, Kotak Mahindra Primus, handling credit risk management. Post this; he moved on to Kotak Mahindra Old Mutual Life Insurance as an advisor to the Life insurance subsidiary, managing the debt and equity portfolios. He joined Kotak Mahindra AMC in February 2006 and has been handling equity schemes for Kotak Mutual fund since January 2007. He has over 13 years of experience in the financial markets of which 11 years are at Kotak Mahindra group.

Could you throw some light on the structure of your research team? What according to you goes into good portfolio construction?

We have a buy side research team with 8 research analysts and they cover more than 200 companies stocks across the sectors and across the market capitalization. Each analyst is tracking a sector(s) and stocks there in.

Portfolio construction involves a reasonable mix of sectors and stocks so that it offers diversification to investors and not make them exposed to individual themes / sectors / stocks. Portfolio construction considers the a healthy mix of some aggressive and some defensive stocks so that it generates returns and tries to minimize the downside risks.

How frequently do you churn portfolio for Kotak 30 Fund? The fund is betting on Financials, Energy, and Technology sectors what is outlook for these sectors?

We seek to manage the fund based on our views and outlook on markets and stocks and as such do not have any churn criteria.

We see financials as one of the most promising sectors in terms of growth in credit and earnings. A healthy economy growing at 8% will really provide this industry with the credit growth prospects of 20% and we still have a sizable population that needs to be covered under formal banking channels. Energy is again a promising sector led by de-regulation process announced by government as well as the view that considering global economic outlook (mainly USA & Europe) of a muted growth the crude oil is also likely to remain range bound. Technology is also interesting considering the offshoring opportunities available in western world.

How would you rate the performance of Kotak Opportunities Fund as against its peers? What is the highest individual stock and sector exposure you can take in this fund?

The fund has been performing reasonably well in terms of its track record vis a vis peers as well as the benchmark. The individual stock exposures are capped currently at 5% of the portfolios while sector exposures are capped currently at 25% of fund. We do review the limits based on the sector / stock weights in the underlying benchmark.

What is the general consensus on equity markets? Are money managers still underweight on equities now?

No we do not think money managers are underweight on Indian equities. The equity markets are clearly cheering the growth outlook for the Indian economy. The investor appetite especially of global investors has turned positive on relative growth for India as Indian economy is set to double in next 5-6 years. While valuations may appear a bit premium in near term, we believe that earnings growth will come in to support the valuations.

Market gains this year have been driven mainly by expanding PE multiples for stocks. Are you concerned that the market is too expensive today?

The PE expansion was bound to happen as a reaction to the PE contraction that was seen around 15-18 months back. While markets are getting into above average valuations zone, it is still lower than historic highs recorded on valuation perspective. Also, we think that valuations must be looked into with a forward perspective and on visibility of earnings growth and that`s where a comfort is in place that in the short term valuations may appear a bit premium but we believe that earnings growth will come in to support the valuations. We think the investor`s worry on Indian markets is mainly on account of markets having risen quickly in a reasonably short time.

Foreign fund houses have invested over Rs 710 billion (USD 15.6 billion) so far this year and analysts believe that FII investment in stock markets will cross the last year`s record level. What is your take on this?

We believe that investment flows usually reflect the investor`s faith in sustainability of GDP growth and earnings growth on a relative basis. At the current juncture of global economy. Indian economy - having demonstrated its resilience in past 2 years - ranks among the fastest growing economies in world. This has led to a reasonable investor attention and money; both short term as well as long term. We think this is quite healthy for the Indian economy and markets.

Given that mid and small-cap stocks are more sensitive to interest rates do you anticipate any slowdown in earnings due to increase in interest rate?

We do not anticipate any major impact on profitability due to increase in interest rates at present. The business growth can take care of interest costs. The only risk can be from any major hike in commodity prices that may impact the working capital and interest costs thereon.

What macro factors are you keeping an eye on?

GDP / IIP Growth, Fiscal Deficit, Current account deficit, inflation, interest rates, currency movements.

Source: http://www.myiris.com/shares/company/ceo/showDetailInt.php?filer=20101006153736707&sec=fm

Fund managers' reaction to RBI rate hike

RBI has raised key rates by up to 50 bps. Check out what the fund managers have to say.

Navneet Munot, chief investment officer, SBI Mutual Fund

The rate hikes underscore the strong demand in the economy. The investment cycle is showing strong signs of picking up, as there are capacity constraints in most sectors. Going forward, investment will be a bigger driver of growth than consumption.

Krishna Sanghavi, head of equities, Kotak Mahindra AMC

There is no doubt about the growth in the economy. And the rate hikes were very much in line with expectations. But from a stock perspective, the more crucial issue is whether the growth in corporate earnings will meet market expectations.

Anoop Bhaskar, head-equity, UTI Mutual Fund

The rate hikes don’t change our view on (shares of) interest rate-sensitive sectors. In India, demand for consumer loans is influenced more by availability, rather than cost of funds. As long as income visibility is good, there will be strong demand for retail loans

Anand Shah, head-equities, Canara Robeco AMC

The message from the RBI to banks is clear: be less aggressive in lending. Banks with a better CASA ratio and strong branch network will benefit in a scenario, where cost of funds increases. At the same time, NBFCs could be adversely hit.

Vetri Subramanium, head-equity, Funds Religare AMC

The monetary policy clearly signals that RBI is more worried about containing inflation at the moment. We expect more rate hikes — 75-100 bps — over the next nine months. The net interest margin of banks could shrink due to flattening of the yield curve

Source: http://economictimes.indiatimes.com/news/economy/policy/Fund-managers-reaction-to-RBI-rate-hike/articleshow/6225237.cms

‘Sustained growth, post stimulus rollback, justifies valuations'

The moving variable to look for is whether growth exists in the system and how profitable the growth is. You will get that from a smattering of large companies and the gigantic listed universe of small and medium enterprises.

There are no defensive businesses, says the contrarian Mr Kenneth Andrade, Chief Investment Officer, IDFC Mutual. There are only shifts in capital allocation based on the earnings growth of sectors vis-à-vis the index. Not wanting to view opportunities based on market-cap segments alone, Mr Andrade, throws up quite a few interesting ideas for investment based on global changes in an interview with Business Line.

Excerpts from the interview:

Indian markets have outperformed most global peers on a year-to-date basis. Are markets taking less note of global risks?

Markets are not less concerned about the global risks that exist except for the fact that, if you look at a couple of trends that have been happening in India and in a significant part of the emerging market, it is contrary to what's happening in the West.

So, that resilience itself is holding out. When I say contrary trends, you've got the US and probably Europe heading into stagflation while you still have inflation in the emerging part of the world. And that, by itself, attracts a reasonable amount of money because inflation is a derivative of growth. So that will hold out in the near term.

What do you make of the current Indian market valuations compared with peers?

We are not expensive; we are not cheap. We are very close to the long-term median line. Added to this, stimulus withdrawal has been happening across the world. In a way India has already had a roll-back of some parts of the excise duties and now the realignment of petrol prices to some market-driven formula.

These are all very good from a macro-point of view as it helps the fisc significantly. And, if growth still does not stop then somewhere you will justify the premium valuations that you trade at.

But we have been seen growth moderation in sectors such as cement or telecom with profit margins too compressing. Could that extend to other sectors?

That will always happen in any industry where there is fragmentation of capacity or introduction of new players. When capacity grows significantly faster than the demand, you would see near-term contraction in margins. The contraction is also essential to make sure the strongest survive.

It's very prevalent in real estate and in some phases in infrastructure where the pricing power just does not exist with the contractor anymore because there is so much of fragmentation. You will start seeing it in the commercial vehicle and automobile market because India has moved from duopoly to probably 10 companies manufacturing four-wheelers andwe have more lined up.

Going forward we will see more segments actually fragmenting and that will lead to contraction in margins, competitive price points and product innovation to stay ahead of the curve.

In the recent rally we saw the traditional defensives pharma and consumer goods outperform. Are we seeing a shift in the classification of defensives?

What is defensive and what is offensive! Let me put this in perspective. You had an FMCG business at the turn of the century which was steadily growing at 15 per cent per annum and then there was this sector that turned up — technology — which grew at 50 per cent per annum. So you simply had a capital allocation choice. So you took that money and allocated it to technology. And yet the FMCG businesses continued to grow at 15 per cent per annum.

At the turn of the century, technology collapsed and FMCG grew at 15 per cent per annum. And so, FMCG was a defensive. But you have to remember one thing, when technology contracted, your index earnings contracted and the (index) growth levels went below the FMCG earnings growth levels. Then the investment economy picked up. You had the same scenario – FMCGs grew 10-15 per cent, while capital goods grew at 30 per cent. Again, there was a capital allocation choice and everything went into capital goods. You had polarisation of capital, so FMCG was overlooked.

Today you have a scenario where the index earnings is significantly below the earnings of the FMCG companies. So you now have a capital allocation which is moving steadily towards the consumer part of the economy as the latter is now growing faster than the investment economy and probably faster than even the outsourcing economy.

And that's playing itself out in the index. So I don't think there are any defensive businesses, expect that while growth has always been there, they trailed the markets; the growth has actually stepped up now. This is true of pharma as well. While domestic formulations businesses have stepped up in growth , the export-driven businesses suddenly have flush, large tie-ups coming from MNC companies, wanting to take the manufacturing capabilities of the local companies to their countries.

The valuation gap between mid and large-caps has shrunk. Where does the opportunity lie for investors? I would not want to go with the bias of market capitalisation. The moving variable that we need to look for is whether growth exists in the system and how profitable the growth is. You will get that from smattering of large companies and since you have such a gigantic small and medium enterprise universe that is listed, you would also get it from some part of that market. So you just have to look at opportunities and there are plenty of them out there.

The consumer story is probably one of the biggest that's setting itself in India. And when we talk about the consumer story we are not saying it in isolation because all emerging market economies are focussing on the fact that they would try to get the consumer back to revive their economies. So, China is no longer looking at the American consumer, it is looking at its own for growth. India or Latin America or some parts of Asia are all doing the same thing.

Two, on the outsourcing front we still enjoy the arbitrage in the standards of living between the West and this part of the world. But, more importantly, with wage inflation between 20-30 per cent in China this year, our economy would tend to be a little more competitive in this space. So we will take market share in some of the low value-added items, such as textiles.

Three, there will also be a shift in technology, in the sense that we are moving away from the desktops and networks are getting increasingly more bandwidth-intensive. So you will see a lot of capex happening on the technology part, which does not necessarily mean just software.

Four, Europe is more competitive than China now because Euro has depreciated vis-à-vis the dollar and China is going to peg vis-à-vis the dollar. So Europe goes into being one of the largest (manufactured) exporters in the world all over again. And they have got a very large ancillary base out of India. So, these are all opportunities that exist in the entire system.

Now you can play it through the engineering companies of the foreign MNCs in India, which are large-caps. Or you can play the outsourcing stories on some players in the technology space which are large-caps.

In manufacturing if we need to go back to textiles, which are low value-added, it can be through mid-caps. If we need to play with the entire consumer gamut, we get them through discretionary spends, such as automobiles, which are large-caps, or through domestic appliances, that are either mid- or small-caps or FMCGs, which are available across the entire spectrum.

So, look at the opportunity and if there are large and mid-caps, then they both should go together.

However, small and mid-sized companies carry the risks of being hit by any hike in borrowing costs. Does that make them less attractive?

What is relevant here is to note that the mid-caps are actually much better financed than the large companies. Not too many of them are actually over-leveraged. A lot of them are setting capacities; despite flat top-line they have not made losses.

Some of the very large companies are completely over-leveraged. So, on a structural basis, I think the smaller part of India is a little more resilient than its larger peers. Again, by definition, this does not mean that the smaller part is going to overtake the larger part. All the large companies that we know of are in commodities, engineering, banking and some part of technology.

Of the four, technology is the only one that is deleveraged. On the other hand, if you look at mid-caps, you've got contractors, which are working-capital intensive, so no significant leverage; which is the case in the engineering space as well. Then you have consumers, who are free cash-flow and then pharma companies, that do not need very high cash.

Q. Would the recent deregulation call for a re-rating of stocks of OMCs?

See there is an opportunity in the entire space and the opportunity is that this sector is the largest part of India's GDP and of all them fall in the services part of the GDP. Now, if you look at that and say that private sector does not realise that there is a huge opportunity in addressing this space I think it is very wrong. So I would not put these companies at a significant premium to the existing petrol stocks or oil marketing companies listed elsewhere in the world or in India. Sure they have got depreciated assets, to that extent it is fair, over and above that I am not too sure we will have a sustained re-rating over the next 12-15 months.

Q. One more topical issue is the introduction of base rate – would it impact borrowing costs of corporates?

You may see a hike in short term financing costs but let me also qualify that statement. There has not been a very large build-up of inventories in India. And working capital is probably the largest part of any company's balance sheet. Project finance is relatively a smaller part. So I would not say that the increase in cost would dramatically affect the P&L account of companies. In some cases, you might see an increase by 1-2 percentage points. That's the range in which a lot of companies may report an increase in borrowing costs. But at the same time it also increases the opportunity of creating a very vibrant bond market. It also means that Corporate India would look at alternative sources of funding which includes going overseas.

Source: http://www.thehindubusinessline.com/iw/2010/07/04/stories/2010070450950500.htm

India delivered better returns than most: Madhusudan Kela, Head-Equities, Reliance Mutual Fund

His rise within the organisation as well as in the fund management industry has been dramatic. But for the past few months, there has beenspeculation that Madhusudan Kela, head-equities, Reliance Mutual Fund, is quitting. Untrue, insists Mr Kela. In an interview with ET, he says that he is still bullish on the big picture India story. However, in the short term, global sentiment will prevail, he cautions.

How do you see the market playing out near term in light of global developments?

In the next 6-12 months, the market will still be ruled by global sentiment. The ongoing debt crisis in Europe can have a meaningful impact on markets globally as in India, if the situation worsens. If one or two Eurozone countries were to default or the euro as a currency breaks down, there will be chaos.

Similarly, if there is slowdown in China, the Indian market will be impacted. Currently, the Indian market is trading at a 25% premium to China. If China’s earnings multiple contracts, there could be a valuation challenge for India as well. However, we have seen over the past six years that the market has produced significantly better returns than most countries in the world. The India story is getting stronger.

For instance, this year, you will see a significant fiscal consolidation, which was a major worry for the market. Over the next 2-3 years, the gas and oil reserves will materialise and this will further improve our fiscal position. And the real dark horse could be the UID project which can significantly prune the subsidies and improve tax collection. And hopefully, the pilferage will reduce. I believe a 8-9% growth with more reforms from the government looks real in the next five years.

How steep do you expect the correction, if it does come through, to be?

If the situation in global markets worsens, we could even see a 15-20% correction in Indian shares. But since India’s fundamentals are only getting better, and viewed in the global context, overseas fund managers will be compelled to increase their exposure to India. Any meaningful correction will be a great buying opportunity for retail investors with a long-term view on equities.

Which are the sectors that interest you?

We continue to remain overweight on the pharma sector. We are bullish on companies which will benefit from the domestic consumption story in India. We like public sector banks. They have underperformed the market for a while due to concerns over rising bond yields and hence marked-to-market losses on the bond portfolio.

Our view is that PSU banks can grow their loan books 25% for each of the next three years, and they have the capital adequacy to meet the loan demand. The stocks are available at 1.2-1.5 times their book value, and you can’t go wrong if you have a 2-3-year perspective.

There is a lot of pessimism about the telecom sector, more so after the recent 3G bids. Would you take a contrarian view?

Much of the bad news in the sector is behind us. If these stocks see any sharp correction, we would definitely buy them. The stock prices may have underperformed over the past couple of years, but the customer base has more than doubled during the same period.

What about mid-cap stocks in general? Would you still go for them in current market conditions?

Yes, if there are opportunities, we will continue to invest in companies with scalable business models, with earnings growth faster than large-caps, and available relatively cheaper to large-caps.

Your strategy of betting on mid-caps in a big way has been criticised by your peers. They accuse you of boosting portfolio returns by buying into firms with low-floating stock.

Companies like Siemens and Jindal Steel & Power were mid-caps when we first bought them. Not only have they delivered better returns, but are now ranked among the large caps. But I must admit that there have been some wrong bets as well. We have tweaked our mid-cap strategy a bit. We will not buy into very small companies, and would focus on companies with a minimum m-cap of Rs 1,000-1,500 crore.

Locally, what are the factors that could dampen sentiment for stocks?

Below average monsoon would rank high on that list. The reforms process needs to be accelerated. The government has shown resolve, but it needs to build on it, especially in terms of attracting more FDI flows. Rising instances of Maoist and Naxalite attacks could make foreign fund managers nervous. We are highly dependent on inflows at this stage, because there is not much money coming in locally.

How much cash on an average would you be keeping in your portfolio? Your strategy of aggressive cash positions last year was criticised in industry circles.

We will use it more as a tool to improve the portfolio mix. We will not shy away from keeping a higher cash level than our peers if market conditions warrant. But it will not be as high (25%) as was the case last year.

Source: http://economictimes.indiatimes.com/opinion/interviews/India-delivered-better-returns-than-most-Madhusudan-Kela-Head-Equities-Reliance-Mutual-Fund/articleshow/6044698.cms