Despite the pessimism built around the lack of reforms and the waning investor interest in equities, Sandesh Kirkire, chief executive officer, Kotak Mutual Fund, tells Puneet Wadhwa that the current levels are close to the bottom in terms of valuations. Edited excerpts:
The current market levels have built-in a lot of hope for the reforms process getting back on track and an improvement in the overall macro-economic condition. Do you think the fundamentals are supportive of this?
I think it would be early to say that. Reforms and their outcome tend to be a long drawn process. The recent upswing in the market, while is certainly driven by the improved sentiment, yet, the global decline in the risk premium too, have contributed towards that outcome.
However, we do not expect significant policy changes from hereon due to the current nature of polity, though, the initiatives to address the slowdown in investment may be effected. Suffice to say that the current levels are close to the bottom in terms of valuations.
Fundamentally, the economy has expanded by more than 40 per cent in nominal terms since the 2008 meltdown, and that is yet to reflect fully. There remains a lot of value in the market, albeit its full realisation is a function of upbeat investor sentiment, which is not there yet.
How much confidence do the statements from the various central banks, including ours, instill as regards the easy monetary/fiscal policy in the quarters ahead?
I think the global central banks would continue to push for growth by keeping interest rates low for a long time to come. We believe monetary easing, at least in the Indian context, is a matter of when, not if. RBI may wait out for the market opinion about the current monsoon season before it takes action. Additionally, they may also want to gauge the underlying strength in the rupee.
So, how long can RBI choose inflation control over growth?
I think it’s the currency volatility which has to be tamed, since this would support both equity and debt markets. The rupee’s decline is a hurdle in fighting the inflationary spiral. This entire model of current account funding through capital inflows, which we have followed all these years, makes monetary management very difficult. For the rupee to appreciate, the sentiments of both – the global investors and the exporters / importers - have to improve. This can only happen with some reforms in the days to come. A softening dollar could bring down the inflation, making it easy for RBI to push for growth through monetary easing.
As a portfolio strategy, how much exposure would you recommend to equities?
We are staunch advocates of objective-based investment. The current approach is towards a portfolio that is defensive, that is, it is driven by local consumption. However, any directional change on the policy front could see realignment towards sectors that benefit through the recoup of the investment climate. In the current market scenario, investors may allocate between 10-35 per cent at the least in equities.
What are your views on the auto and banking spaces?
The demographic penetration of auto and financial sectors in India is still low in relation to their overseas peers. So, from a long-term perspective, we remain positive. However, in the near-term, the asset quality issues, the increasingly pressured net interest margins and increased capitalisation requirements, warrant a more circumspect approach for the banking space, especially PSUs.
A slowdown in the automobile demand due to the economy and the high interest rates; have considerably restricted the growth potential of the auto sector. Increased input costs, increased tax incidence and rising competition have pressed on the margins. We, therefore, remain largely conservative in our allocation with respect to these sectors.
How do you see the capital goods and infrastructure sectors performing in the quarters ahead given how the interest rates may pan out?
From the current standpoint, the odds are not favourable. Even if the interest rates were to mellow down, the energy crunch along with the squeeze in the order inflows (especially from the power sector) remains an issue. The high turnaround time in mega projects along with the associated regulatory difficulties remain concerns. Regulatory clarity on land acquisition and coal supply may assist in changing the market sentiment.
The mutual fund industry seems to have been hit by a double whammy with investors moving out of equity funds and schemes trailing their respective benchmarks. Your comments...
Some schemes that have a conservative style may have underperformed in the last six months, but over the longer periods, most of the schemes have provided competitive value. The nature of the underlying equity market has been such that point-to-point (P2P) performance over the last five years has left much to be desired. And from an investor’s standpoint that can be a little disconcerting.
Mutual funds are ultimately alpha players. My estimate is that almost two-thirds of the schemes (by way of assets) would have outperformed their respective benchmarks over the medium to long term. This is not bad when you compare it with the developed economies.
But I would say that we must see equities per se, as a retirement-oriented asset for young people. For the investor to derive the full potential benefit, it is necessary that investors provide it with the same perspective, discipline and horizon that a retirement investment calls for.