The biggest challenge for the market is market itself as the valuation tends to overshoot the expectations in the short to medium term and then correct. (Photo: PTI)
One shouldn’t get into equity without longer perspective tells Saibal Ghosh, chief investment (CIO) and business development officer, AEGON Religare Life Insurance to The Financial Express online. He further suggested to go overweight on demand aggregators like banks, cement and auto companies, especially commercial vehicles. Excerpts from the interview
Q. How do you see Samvat 2071 for equity investors? What is your expectation from Samvat 2072?
Ans. I would not like to confine my view on market for such narrow duration of time at a crucial juncture such as this. Notwithstanding the jittery sentiment that the market is currently going through very seldom it has so occurred that so many positive things are happening for the country at the same time. The commodity and oil for which India is a net importer are on a secular fall, inflation is softening, rates are falling, corporate margins have started bottoming out for last two quarters, twin deficits are well under check, Foreign Exchange reserve is at its peak, rupee has been stable and decoupled from the fragile five, the Government is at center despite the recent disappointment in state election is not facing any major political risk, and we can continue counting many more. But does it all mean that the market is facing no challenge? Of course there are challenges in short to medium term and there always will be some challenge or the other. The biggest challenge for the market is market itself as the valuation tends to overshoot the expectations in the short to medium term and then correct. But we as long term investors need to recognize a cycle and design the portfolio accordingly. This is clearly a cycle to construct a portfolio to earn good return from the equity market.
Q. What advice would you like to give to equity investors in the present market scenario? Suggest some sectors with reasons which can give positive return to investors in Samvat 2072?
A. I said that this is a cycle where one has to be constructive on the portfolio and design it to make more money than losing less money. And, obviously in a cycle such as this, one has to be overweight on the sectors and stocks that will be most benefiting from turning around of the economy. My advice would be to go overweight on demand aggregators like banks, cement and auto companies, especially Commercial Vehicles. However I must warn here that the market will be extremely volatile going forward till we see traction in the earnings. Therefore, one has to be careful in allocating his/her fund in equity. If one has identified the fund that he or she will not require in next 3-5 years then only that much fund should be invested in equity market. But once such fund is committed then one has to be patient through the volatility. And again my advice would be that do not try to time the market as any time is good time as long as it is for long time.
Q. What is your take on present market valuation? How much upside do you expect from benchmark indices till next Diwali?
A. From the perspective of FY17 earnings growth expectations, the market at the current level is not cheap. I also see some risk in missing the FY17 earnings estimate as infrastructure led GDP growth will take longer time to bring traction in corporate earnings. However, I would not like to confine my view from such narrow perspective in a cycle such as this as in that case we run the risk of missing the woods for the trees.
Q. What are the triggers which can give direction to markets from here onwards?
A. I do not know about the short-term triggers. But over a period of time market will gain confidence when it sees the benefits of various reforms that have taken place so far are bringing in growth in corporate earnings. While there are disappointments in delay of GST bill or Land reform but what we tend to forget is that we have also achieved a great deal in last 16/17 months. FDI increased in Railways, defence, insurance and Oil sector reforms will go a long way in boosting the economy. Many pragmatic proposals have been moved on Apprentice Act, Factories Act and Labor laws to improve the ease of doing business. The Mines and Mineral Bills will improve the logjam in that sector. The coal mines amendment bill will help resolve the long pending auction and allocation issues in this sector. And an ambitious plan has been drawn to spend $240 billion in next 5 years in Port, Railways and Road sector. The benefit of these will not come overnight but will unfold gradually over a long period.
Q. If you are building a portfolio then how much weightage do you give to other asset classes such as equities, gold, fixed income and others?
A. One shouldn’t get into equity without longer perspective. Therefore, one has to carefully allocate the fund in equity after assessing his future cash flow requirement. The thumb-rule says that one should not allocate more than (100 minus one’s age) % of his investible fund in equity. This rule is based more on common sense than any scientific logic. As you age your risk taking ability goes down and therefore you should take out money from riskier assets & allocate it to lower risk assets like fixed income.
Q. How do you see gold and silver as an investment options over equities in Samvat 2072?
A. I would avoid any kind of metals at the current juncture.
Q. What is you expectation from foreign institutional investors? Can we expect strong money inflow from FIIs in Samvat 2072?
A. We are hearing that there have been redemptions in the emerging market and Asia Pacific funds in the recent month. And this will continue if the fed rate hike happens and dollar remains strong. Therefore, if the overall size of these funds comes down then no matter whether the Fund Managers remain overweight on India the incremental buying from the FIIs will come down. We are also hearing that some of the Pension funds are selling while the sovereign funds remain invested in India. However, this is more than compensated by the Domestic Institutions flow, particularly from Mutual funds buying as the household savings in the economy have again stared shifting back to financial savings. One estimate says that the annual buying of DIIs could be around US20 billion. And these flows will be much more sticky (than FIIs flow) in nature and will help in better distribution of equity holding which is good for the market. So I am not particularly worried about the flows.
Q. The midcap and small-cap indices have been outperforming benchmark indices for the second year in a row. How do you see next 12 months for mid and small cap funds.
A. Some bit of midcap should be a part of one’s portfolio as large cap stocks do not represent all the sectors in the economy. Besides some of the quality mid-caps will become a large cap at the end of the cycle like this. But one has to exercise extreme caution while allocating fund and investment in these stocks. One has to understand that the risk is highest in this category of stocks. Besides the disclosures are often inadequate and they (mid/small cap stocks) are less covered by the research houses. Therefore, it is better to leave this part of investment to the expert and invest through specialised fund houses managing mid-cap/small-cap funds rather than investing directly.
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