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Small market rallies see investors booking marginal profits

Q&A with Akshay Gupta, MD & CEO of Peerless Fund Management Company

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Till the time equity markets do not give decent returns, investors will continue to flock towards fixed income, says Akshay Gupta, MD & CEO of Peerless Fund Management Company. He expects another cut in the December policy and sees rate cut starting only from January 2013. Excerpts from a conversation with Neha Pandey Deoras and Tania Kishore Jaleel -

Q. How do you see the stock markets panning out over the next 1-2 years?

A. Globally, stock markets would deal with considerable news flows over the next few quarters. Substantial attention would be on how the US and Europe manage their debt and come out of the fiscal mess. However, the longer term issues of deleveraging will remain in the backdrop not allowing the markets to have a one-sided bull run. Combined with slowing fast-growing emerging economies like China and India and geo-political problems in the Middle East, these are testing times for global stock markets. That said, the global economic gloom presents India and other outsourcing nations with immense opportunity.

On the domestic front, we continue to grapple with political issues, fiscal slippages, high Inflation and low growth. We believe that the gloomy scenario is already built in the present valuations. If the Indian economy can take this outsourcing opportunity with both hands and manage the above issues successfully, then the stock markets should see better times in the coming 1-2 years.

Q. What are the investment trends in the market, at present? Have investors started coming back to equity funds?

A. Equity markets have not been able to give satisfactory (better than fixed income) returns since 2008. Hence, even a small rally leads to a category of investors booking marginal profits and moving out of equity. The trend will continue till markets move into a new territory and that can happen only when the domestic macros improve. Till that time, incremental funds are expected to go in the fixed income category.

Q. The RBI Governor virtually dashed all hopes of a rate cut by reiterating his view on inflation. What is the market expecting from

the December 18 policy?

A. Though the latest monthly inflation has come lower, it still remains quite high. Incremental impact of fuel price rise is yet to sink in thereby the monthly WPI is expected to remain at elevated levels for next couple of months. The positive in the latest policy comments is that though the focus continues to be inflation, some tilt is shown towards supporting growth via liquidity infusion and rate cuts beginning January 2013.

Market is not expecting any repo rate cuts in the next policy. However, one can expect another 25 bps cut in CRR if the liquidity is below RBI’s comfort level.

Q. Which sectors do you favour in the present market?

A. Consumption (FMCG, auto and pharma) is probably one of the themes that has done well till now. Though the valuations are quite rich, we believe that increasing rural penetration, higher disposable incomes and favorable demographics should continue to benefit a section of this story over long run.

We also like companies with full range of infrastructure solutions, which would benefit from various reforms and capture the pulse of the economy without bias to a particular segment. From next calendar year inflation is expected to trend lower and so should the key rates. Therefore we like select NBFCs and banks. Private banks score over public sector ones on asset quality and ROE.

Increase in healthcare budgets globally and with large number of products going off-patent, an exciting opportunity exists for export oriented Indian pharma companies. Large software companies with well diversified operations are also expected to do well.

Avoid energy, metals and commodities, telecom, real estate and related sectors due to uncertainty in policy framework.

Q. What should be investment strategy for gold?

A. Gold had a smart rally last year mainly on account of the global crisis which led to investors adopting the risk-off strategy. This coupled with depreciating rupee brought in more gains for the domestic gold prices. We do not expect gold prices to rally like last year. But, gold continues to be a good hedge against currency depreciation, uncertainty and inflation. Continuous interest by various central banks and genuine consumption demand should keep gold prices firm over medium to long term.

Q. Why has your company remained heavy on debt? Will you be launching more equity funds?

A. Our philosophy is to launch solutions that suit customers’ needs. Fixed income and related solutions have been appropriate in the last over 2.5 years of our operations. We have one equity fund, which has been managed as per our philosophy of giving superior risk-adjusted returns. We shall be launching more equity funds in the future if there is demand.

Q. With many fund houses being bought out / selling stake, do you think there is more room for consolidation in the industry? What does all this consolidation mean for the investors and the industry at large?

A. When there are 50 fund-houses in a Rs 7 lakh crore industry, there is bound to be consolidation. Serious players with sound strategy and commitment will continue to do well. Investors should not get unduly worried with consolidation as the structure of a mutual fund and its attendant disclosure and regulatory norms protect the investors’ interest despite M&A activity.

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