Since India’s growth is expected to continue unabated in the coming years, equities could give better returns than debt in the medium- to long term, says Sanjay Sachdev, President and CEO, Tata Mutual Fund in a conversation with Puneet Wadhwa. Edited excerpts:
How do you think the global markets, including India, will pan out over the next few quarters? Could the macro-economic headwinds pave the way for a correction?
The macro problems faced by the major economies, such us the high debt levels in euro-zone and US and the imbalances in Chinese economic growth model, are structural. They are unlikely to be solved in a one or two quarters. Also, the solution to these problems involves trade-offs between current / short-term economic pain and longer-term economic growth.
Market movements in this backdrop have been largely influenced by the actions of central banks in these large economies, be it quantitative easing by the US Federal Reserve, credit tightening by the Chinese central bank or the long-term refinancing option (LTRO) by the ECB.
This trend is unlikely to reverse in the short term and volatility will remain high as markets oscillate between ‘risk-on / risk-off’ phases.
What is your investment strategy at the current juncture? Do you think it is now more of a traders’ market rather than that of value seeking investors’?
In the backdrop of many macro challenges, we continue to believe that India’s growth story is structural in nature, and therefore, equities are likely to give superior returns over debt in the medium- to long term. Also, many global macro strategists have argued that equities globally are cheaper than bonds.
Thus, in the equity space, we are following a more bottom-up strategy. Our strategy is two pronged: look for businesses that can continue to do well from a medium-term view, despite the adverse macro, and also keep a close eye on valuations of good businesses that are not doing well currently to see if we can get good bargains.
Cement and telecom sectors have been hit by regulatory changes / scams recently. So, have the investment choices for investors in the equity segment narrowed down considerably? Which sectors / themes / stocks are you overweight and underweight on now?
We have a good weightage on private sector financials as also some cement stocks, despite the regulatory headwinds. In general, in our diversified funds, we are underweight on public sector banks, global cyclicals, such as metals and refining and petchem.
What are your key takeaways from the Q4FY12 results of India Inc announced thus far? What are your broad expectations from this results season? Are more downgrades in store as we head further into FY13?
The results declared so far have been a mixed bag, in a sense, supporting our strategy of a more bottom-up approach. Private sector financials have reported good results, while in the information technology sector some large companies have disappointed, though others have given good results.
Overall, we still feel that for Q4FY12, sales growth will be in the range of 15-20 per cent. We feel operating margin pressures are bottoming out and PAT growth is likely to be in the 10 per cent range for the Sensex.
As per Amfi data, the mutual fund industry’s month-end assets under management as of March-end slipped over 13 per cent, the lowest level since June 2009. How do you interpret this development?
The reasons for this are twofold. Investors need more education on equity markets and the nature of their returns. During certain phases, returns can be good, whereas at other times, it would take even longer to earn expected returns.
The nature of markets has been bearish in the recent past. Those who have invested in equity markets over the past three years have not seen returns commensurate with their expectations. Secondly, while we all understand the need for educating the investors, their numbers are dwindling in the wake of several regulatory changes, which have affected the industry.
Assets of equity funds declined around two per cent in March, while Gold Exchange Traded Funds (ETFs) logged inflows. Do investors now prefer debt to equity given the volatile and range-bound markets?
The very nature of markets is such that different asset classes perform during different points in time. During high interest rate phases, it is not surprising to see non-equity asset classes do well. At current interest rates, it is not surprising to see investors moving into debt funds for stable returns.