HOME > MUTUAL FUND > EXPERT VIEWS
  EXPERT VIEWS
MUTUAL FUND NEWS
This is a good time to start investing
Wed, Sep 04, 2013
Source : Shoaib Zaman, Citrus Interactive

BP Singh, is the Executive Director & CIO - Equity at Pramerica Mutual Fund. He has over 18 years of experience in broad based investment management, including portfolio management of equity schemes with a bottom-up investment style. He has also worked with BCP Advisors Private, Atlantis Investment Advisors (India) and Deutsche Asset Management (India).

He shares his views on the Indian equity market, twin deficit, view on the Indian currency and his views on what investors can expect in the next five years.

What is your view on the twin deficits? Will the targeted levels of 4.8% of fiscal and $ 70 billion of Current Account Deficit (CAD) be held?

Both the fiscal and the current account deficit have been quite worrisome for a fairly long time. We had raised our concern about the current account deficit (CAD) for the first time in the month of January. The depreciation of the Indian Rupee, has had an impact on the fiscal deficit. Fiscal deficit is the government’s revenues minus its expenses. One way to manage the deficit is by reducing the expenditure. However, in the current scenario, when private sector capital formation is very low, if the government also reduces the capital formation then it could result in a severe slowdown of the economy.

All projections by the Government have been based on a slightly higher nominal GDP growth rate. The revenue tax numbers were budgeted at 19%, which are not likely to be met, so revenue shortfall is bound to happen. Inflows from disinvestment have also been budgeted for, which is non-tax revenue, but given the current market scenario, it seems difficult to achieve.

Again on the expense side: you have the food security bill, oil subsidy (that would be higher due to rupee depreciation), higher borrowing cost (as bond yield will go up), defense expenditure, and this being election year, there will be an increase in the government’s expenditure - all of this will add up the pressure on fiscal. Given this backdrop, I doubt if the fiscal deficit number is achievable.

As far as CAD is concerned, it depends upon what kind of steps the government takes vis-à-vis currency. If we let the currency remain at around Rs. 65 levels, then probably the current account deficit may stay at the level of $70 billion because of the lagged export growth and moderation in the imports, mainly because of currency depreciation. However, if the Rupee is made stronger and is pulled back to the old levels between Rs.55-60 then probably the current account deficit number will not remain at $70billion, it could probably be higher. Therefore, the depreciating currency will play a key role to ensure that the CAD is maintained.

Where do you see the currency level?

In these times it’s difficult to say what the ideal level is. When the deficit is high and your reserves are not in a situation to completely take care of it -- then investors tend to behave in a very extreme way and they take the currency to an extreme valuation. So I think the currency heading towards 70s is a distinct reality. However, if one is to take the view in about two years time that where will the currency stabilize then I think it should stabilize around Rs 61 or Rs 62 per dollar. Everyone is talking about the level of Rs 70 because the market does not see the equilibrium all the time. Markets always go to the extreme in which case it will go to that level or higher.

If the rupee depreciates to Rs 70 per dollar don’t you think the CAD might swell? Then do you think it can become unachievable either way?

No, when people look at the depreciating currency and they start thinking about the CAD, they think in terms of rising import costs. What you must understand is that: CAD will go up in rupee terms, not in the dollar terms as our currency is depreciating. At that valuation the government may not be able to absorb everything and it will have to pass on the increase in price to the end consumer. For example if the oil prices are transferred to the consumer there will be a slowdown in the demand for oil. Similarly for other goods that India is importing, price rise will be passed on to the consumer -- there will be slowdown in the market. So I think the import will slow down.

Similarly, at that kind of currency levels the exports will actually rise. So we will find that there will be improvement in the CAD. This currency depreciation will actually help us bridge the gap in rupee terms.

Most of the views that are being expressed believe that once the currency depreciates it will not have an impact in terms of demand and supply. Exports are bound to rise. Similarly, imports are bound to come down because costs will go up. In any economy that is slowing down the consumers are not comfortable paying an extra 20% to buy the same thing. Therefore, consumers always reduce consumption, which will in turn have an impact on the CAD. So I don’t think the current account deficit will rise because of the depreciating currency. In fact depreciating currency is one of the solutions for the CAD.

The NSE Volatility index had hit a new high, going forward how do you see the markets will perform?

The volatility index goes up whenever there is a change in the economy. Today there are multiple factors, which are operating and which have an impact. Apart from the domestic factors which we have already discussed, there are other key factors like foreign inflow in the equity market.

The liquidity flow in India is not happening because the Indian market is attractive, it is flowing in because there is a lot of liquidity outside and there are very few other options to invest. Whenever such a flow takes place, there is a less conviction in the investment and when there is less conviction in the investment then any change in the view or any change in the surrounding results in multiple reactions. In these circumstances, the volatility will remain high and we, as an investor, will have to cope with it.

Till the market gets unidirectional, at least after a year, you cannot expect the volatility index to come down.

So do you think, the market will start rising, or a new bull run will start in a year’s time?

Yes, in my opinion in a matter of a year. However, this will not hold true for the economy. The economy will take two to three years, but markets usually perform ahead of the economy.

You would have noticed that phenomenon when the market reached its peak in January 2008. The actual economy peaked much later; it continued delivering 9 per cent return.

What kind of index level do you expect after five years?

I cannot pin point a specific level, it entirely depends upon the kind of decisions taken in this particular period. What I can see are the circumstances turning in favor of the manufacturers and the entrepreneurs who will actually want to invest in the market and the economy. And when they feel like investing, the investment demand will go up and that will drive the market. Now at that point of time, it depends on the incumbent government, how they deal with the situation, whether they provide a more favorable atmosphere for investments, will determine where the market will reach ultimately.

What do you see from the Federal Reserve’s statement, the fed intends to stop liquidity going forward? They have indicated that by June 2014 is by when they will reduce the quantum significantly, and that itself has brought so much of scare for the emerging market. What is your expectation and reading of the situation?

The Fed is trying to achieve multiple purposes through this particular thing. On one hand it is trying to prop up the weak US economy to do well. At the same time it also wants to ensure that the bubble around its liquidity policy doesn’t become too big. Remarkably, they have managed to do both very well. The Fed is giving enough indication that they need to cut down on the supply of liquidity. Therefore, all those people who were riding the market or the various asset classes because of the free liquidity that is available from the Fed are now dissuaded from participating in these markets.

How much will Fed go ahead and withdraw the liquidity?

The Fed is not withdrawing the liquidity, that’s what the people are reading wrong. Fed has stated that the pace of putting in liquidity will go down. Can Fed act much aggressively than what the general consensus is? I do not think so, and the reason for that is Fed is not the only central bank which is putting in liquidity in the system; the ECB, Japanese bank and even China, all of them are doing that. Now even if Fed decides to withdraw liquidity, in today’s globalized world, liquidity quickly moves from one market to another. So when you have so many of your counter parts, particularly these three, large-size counter-parts, stimulating their economies, pumping in liquidity, it does not make too much of sense to withdraw liquidity from your end. There will be token withdrawals, which will take place but ultimately the manner in which the capital will be withdrawn from the world economy is when Central Banks will come to certain kind of consensus on how to handle this situation.

As far as market is concerned, it has reacted as if the Fed means that the $85billion buy back will be reduced to $65billion. But if you ask me, the probability that the Fed would reduce this so drastically is not more than 50% at this point of time.

So you still expect the FIIs to keep flowing in?

You need to read it in a different manner. When such changes take place, bond yields start going up and assets start moving from bonds to equity. There is a lot of money flowing into the equity world-wide; the equity inflow into India will continue to rise. However, the bond inflow will not rise, it may decline. So if you look at the total FII inflow in India then it could probably decline, because in the last 12 months we had a decent amount of debt money inflow as well.

What time horizon should investors keep when investing in equity market? Most of the time, the general wisdom given is that one should invest in equities only if they have an investment horizon for five years or more. For last five years, not all investors have seen satisfactory returns?

In the financial industry, we ended up coining this term “five years”; people look at the history and then decide that if the market has performed in the past it will surely do well in future. I don’t think one should take the five year rule of thumb so literally. It needs to be taken vis-à-vis the cycle where you are operating in.

The last five years were marked by relatively low inflation and poor performance by the market but some investors made a lot of money, due to the wealth effect and a high growth rate. Next five years will see very high inflation, a very low growth rate but you will have a very good performance by the market because of the improvement in the operating margins of corporates.

I think this is a good time to start investing in order to make good returns in the next five years.

Do you think the rally would be in the large-cap space or the mid-cap space?

Rallies always take place on the leaders. It also depends upon the industry/sector. If in a particular industry, a large-size company is a leader, is cash rich and comfortably poised, it will make the most of the rally. In any particular industry a smaller company is a leader, cash rich and comfortable then it will get re-rated. When a re-rating takes place then it doesn’t matter if the company is large or small, all that matters is whether it will survive. One should not base their buying decision whether the company is a large-cap or mid-cap, buying decision should be based on who will survive.

Which sectors are you bullish on?

As of now I am bullish on IT, pharmaceutical and am also bullish on some of the companies who also have business in the overseas market. When consolidation takes place, their earnings will go up. These are completely export oriented units that I am bullish on. However, there are certain sectors which have become very attractive due to purely valuation reasons. In those sectors we are looking at those individual stocks. We are looking at companies who are cash rich, who have a good business model, have good corporate governance and also those companies who will be able to take advantage of the emerging market situations.

What are your views on the banking sector?

At this point of time, I have a mixed view on the banking sector. With a 2-3 years outlook, I think the market cap of the banking sector needs to correct. In this process of change that we are talking about, a large number of NPAs are being created and these NPAs need to be written off against the capital. We also see the interest rate rising. In such a scenario, banking sector will have to capitalize themselves at the current valuations or even lower valuation which makes it less attractive. However, if you look at the short term or very short term, because the banking stocks have corrected a lot and now we are seeing the currency stabilizing and liquidity easing, we could see a minor rally in banking stocks. If I take the short term view then I am positive and if I take a long-term view then I am not positive.
 
|
|
|
|
|
|
|
|
 
blog comments powered by Disqus
  RELATED NEWS >>
September 17th , 2018
India’s long term growth story is intact: Harshad B
read >>
April 24th , 2018
Earnings pick up likely in infra, consumption, auto
read >>
December 20th , 2017
Equity Market Outlook – Mr. Anand Radhakrishnan
read >>
April 06th , 2017
Interest rate cut cycle is over: Suyash Choudhary
read >>
Most Viewed >>
September 06 , 2024
Expect new MPC members to be in place in time:
September 12 , 2024
Sensex plunges 398 points, Nifty breaches 25K
September 13 , 2024
Sensex ends 1,440 pts higher! Investor wealth
September 13 , 2024
Sebi considers new rules to curb risks as tiny
EXPLORE
© CITRUS INTERACTIVE
Designed & Developed Accord Fintech Pvt. Ltd.