<p>Domestic investors continued to eschew stock markets last year despite indices unexpectedly jumping over 25%. Majority of market participants are holding their bull stance for the current year too. Navneet Munot, chief investment officer of SBI Asset Management Company, is quite optimistic about comeback of local investors and expects momentum to continue. In a conversation with Chandan Kishore Kant, he says that the country’s benchmark indices can deliver a 15% return in 2013. Edited excerpts:
Are we heading for one of the biggest rallies in 2013?
I think we will see a new high for the index this year. I see scope of around 15% earnings growth next financial year (FY14) and marginal re-rating of the PE ratio which would ensure that markets can overall deliver more than 15%. Bulk of the gains will be in first half of year though markets will remain volatile. That is at the index level. Having said that, I expect several middle and small caps stocks which are the undervalued segment to do better and stock specific returns could be reasonably decent.
Doesn’t the macro-economic scenario concern you?
While on the macro front some of the concerns remain, there will be a bottoming out in the macro data as well as the corporate profitability in another quarter or so. Apart from that the other trigger for the market to move higher would be the continued action from the government side as some measures are expected to revive the capex cycle and boost investors' sentiments.
What do you think would be the biggest event this year impacting Indian markets?
We have to watch incremental data, RBI's action, trends in corporate profitability and another big event could be politics. How the government acts in next couple of quarters needs to be seen as political scenario will weigh a lot on market sentiments. We also have to watch the global situation.
Global investors participated heavily in Indian markets last year but local investors stayed away. Would domestic money flow in or are local investors still hesitant?
I am quite optimistic that the year we will see revival of domestic investors' interest in equities. For last 3-4 years, domestic investors remained net sellers and it cannot continue forever. At some point of time people will start buying into stocks and I think we may see that happening in 2013.
What makes you so optimistic that retail investors will come back?
The market crash in 2008 dented investors' sentiments big time. Interestingly, other asset classes delivered better returns post 2008. So, asset allocation has become too skewed in favour of gold, real estate and fixed income. I think there is scope for investors to increase their weight on equity side now because they (investors) are extraordinary underweight now. Percentage of share of the household saving going into equities is at a 20 year low and that cannot continue forever. An asset class which has got a pretty good long-term track record of delivering good returns, has beaten inflation handsomely; cannot remain out of favour for such a long time. It's just a matter of time and I think we are reaching that tipping point.
Where would you be pumping in money this year?
Financials, consumer durables and Infrastructure would be the segment to look at. I believe that interest rates will head down, so interest rate sensitives which includes financials and autos (to some extent) would turn out to better bets. We also like investment related theme as we expect a pick-up in capex cycle and some push on infrastructure from the government side -- stocks in that sector are looking interesting with a caveat that you have to be wary of the balance sheets in some of these cases.
What about capital goods, given the fact the of late they are showing some reviving signals?
By and large, the whole space - capital goods, engineering, construction are looking interesting but we have to be choosy in terms of picking the right kind of stocks.
And sectors you are underweight on?
We are underweight on consumer stables as there are pockets which have reached over-stretched valuations. Pharma would be more like a stock-specific play rather than sector-specific and we are actually overweight that sector. We would be marginally underweight on IT.
Telecom is another sector which witnessed lot of action and the same is expected going forward. What's your call on it?
Of course the stocks have under-performed for long time now, and it could be an interesting contra bet. In our contra fund, we are playing it as a contrarian call.
Does retail or for that matter aviation look attractive on the back of foreign direct investment (FDI)?
The problems with some of the large players in aviation have made government look at the sector more favourably. There is growth potential but of course there are lots of regulatory issues. We believe compared to the potential of the sector the market cap of the listed players gives us a feeling that there are some stocks which are worth playing. We own one of the stocks in the sector.
As far as retail is concerned, the recent regulatory development has been positive. In the very long run, there is potential in the sector and the incumbent players will be in a position to leverage upon their presence and the new global players will surely be eyeing them.