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Earnings growth may be in the range of 12-13% in FY13: Vetri Subramaniam

Interview with Chief Investment Officer, Religare Mutual Fund

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The worst performing equity markets, currencies, sector and stocks of 2011 are the best performing ones in 2012. However, the local macro environment and earnings trajectory still appear weak, Vetri Subramaniam, chief investment officer, Religare Mutual Fund, tells Puneet Wadhwa. Edited excerpts:

India has been one of the best performing markets in 2012 across the globe. Did the upmove catch you by surprise?Have we run up ahead of fundamentals?
Investors appear to be rushing into everything they were running away from in 2011. The worst performing equity markets, currencies, sectors and stocks of 2011 are the best performing ones in 2012 on a year-to-date (ytd) basis. I think the ferocity and speed of the move has come as a surprise. While valuations were supportive at the end of 2011 at a near 20 per cent discount to long-term averages, this swift pullback has taken us back quickly to the long-term average of trailing valuations.

The local macro environment and earnings trajectory still appear weak. For this rally to sustain, we need to see an inflection point in growth and earnings.

Where do you see the Sensex/Nifty by the end of 2012? Are there any factors that can derail your estimates?
Our expectation is that growth for the economy will stay in the region of seven per cent. Earnings growth is likely to be in the range of 12-13 per cent for FY13, but expect a significant dispersion in earnings between sectors and even intra-sector.

Hence, we expect stock selection to play a more important role from hereon, as the valuation pullback is significant. An assumption of monetary easing is now built into the market. If inflation proves resilient, causing to be cautious about easing, there would be a setback.

On the other hand, the investment cycle is expected to remain sluggish. If the government can spur investments with policy actions, it would be a significant surprise.

What is your investment strategy at current levels?
Are you fully invested? The easy pickings in terms of stocks with healthy balance sheets and cash flows at reasonable or cheap valuations are long gone. This rally has a significant global macro character to it and, so far, it looks like a repeat of the 2009 rally. Companies with troubled balance sheets have done better than their healthier counterparts. This appears unsustainable in our view. On aggregate we are about 93 per cent invested in our funds.

What are the key takeaways from the December quarter results of India Inc? Which stocks/ sectors are you overweight and underweight on?
The December quarter results have been slightly better than expected, if you exclude the foreign exchange-related losses. The slowdown in growth is now more broad-based and not limited to the investment cycle-related sectors.

Pressure on margins from raw materials has stabilised. Now the key is the level of competition within the industry as companies battle for market share. In our view, stock selection is as or more important than sector selection. The key is to be invested in companies with strong fundamentals and healthy balance sheets.

The government has pegged the FY12 economic growth at 6.9 per cent. Is this achievable?
We think growth will be around seven per cent this year and the next. The investment cycle is weak and while monetary easing later this year will be supportive, the heavy lifting will have to be by way of policy action. The trend in consumption remains positive but is slowing due to inflation.

How do you see the situation in the euro zone? Have the markets factored in the worst?
The LTRO program by the ECB is a quasi-quantitative easing and the ECB has pumped in half a trillion euros to stabilise European banks. This has also led to a sharp cooling in sovereign bond yields in Europe.

There is a promise of nearly a trillion euros to follow in round two of the LTRO later this month. This liquidity provision has been key to the current risk on trade that is playing out across the globe. The risk of a disorderly outcome in Europe after LTRO is now lower, though it cannot be ruled out.

Diversified stock funds posted their best monthly returns in nearly three years in January. Do you see retail investors regain some lost confidence?
Retail investors are currently enjoying double-digit returns on their debt investments. Fixed deposits yield over 10 per cent and government entities have been issuing bonds with effective post-tax yields of 12 per cent. In that environment, investor affection for equity is low.

The rally may kindle some interest but competition for attention from debt products will be stiff, as long as these high rates prevail. The lack of returns for investors over three to five years in equity also means investors are running low on patience.

What are your expectations from Union Budget 2012?
We hope the Budget will embark on the path of fiscal consolidation. The true fiscal deficit is well over six per cent and subsidies are over three per cent of GDP.

There is an urgent need to re-balance the economy from consumption driven by fiscal excesses towards investment. The nearly 5x increase in annual government borrowings over the past five years has reduced availability of resources to the private sector. The need of the hour is to invest in addressing supply-side bottlenecks.

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