Broaden your portfolio, don't chase defensives: Navneet Munot

Interview with CIO, SBI Mutual Fund

Recently, India’s key stock indices hit all-time highs. Though experts are worried about the sustainability of such high levels, Navneet Munot, chief investment officer of SBI Mutual Fund, is bullish and sees a return of 15 per cent next year. In an interview with Chandan Kishore Kant, he says to reap the benefits of the strong trend, one has to aggressively broaden the investment horizon. He adds it isn’t wise to avoid any sector completely, as the worst is past and the uptrend in markets remains intact. Edited excerpts:

Is the recent upsurge in stock markets sustainable?

Though markets may enter a consolidation phase with slightly higher volatility, the broader uptrend is intact. There are a couple of reasons for this: First, markets have been encouraged by the outcome of the state elections.

Also, increasingly, there is a feeling that macro data and corporate profitability are close to bottoming out. Moreover, the global environment has been supportive and foreign institutional investment inflows positive. We have been very positive on the turnaround in the current account and now the Street expectations are being scaled down. Now, Consumer Price Index-based inflation is at a record high but by next year, we expect significant softening. In the near future, the US Fed policy, incremental macro data and the next quarterly results will drive markets. Overall, I think the worst is behind us.

Can 2014 repeat what was seen in 2013, in terms of the uptrend in benchmark indices?

I assume next year will see 15 per cent earnings growth, with a slight re-rating of the market, owing to a better political and policy environment. Based on this, I think a 15 per cent further run from here is a reasonable assumption. Of course, equity markets do not deliver linear returns in line with earnings growth every year, but it is a reasonable expectation. But I do not rule out the possibility of the markets becoming a little euphoric in case the outcome of the general elections is what the markets are anticipating. In that case, lots of returns for the next couple of years could be front-loaded in 2014 itself.

Considering these changes, how are you positioning your investments?

Given the view that the macro economy is bottoming out, there has been a shift from defensives to cyclicals through the last couple of months. The next economic recovery has to be driven by the investment cycle. Through the last couple of years, the government focused on boosting consumption through fiscal measures. Because of the policy paralysis and execution logjam, the whole investment cycle came under pressure. So, the next government has to realise sustainable growth, with lower inflation, can only be achieved through boosting investment in infrastructure and industrial capacities. Of course, the markets start discounting these events far earlier; we are already seeing increased interest in all the sectors that will benefit from the upturn in the investment cycle.

Another thing we need to look at is the opportunity from the rupee’s depreciation, relative to countries such as China. Not only are we becoming export-competitive, there is also scope for import substitution. Several companies will benefit from that. The cost pressure in India is receding. Massive wage growth, an increase in raw material prices, rentals and availability of other inputs have started easing in the last couple of quarters. At some point, interest cost will also decline and that will set the stage for several businesses becoming a lot more competitive than they are today.

Are there sectors you will avoid?

At this point, I cannot single out a particular sector that we can avoid completely. In the last couple of years, the investment universe has shrunk quite a bit, but given the expectations of a gradual recovery and a better environment, one needs to be lot more aggressive in broadening the investment universe, rather than chasing the so called ‘defensives’.

What are the challenges the markets should be worried about?

At any point, there could be a lot of uncertainties. Anything may go wrong anywhere in the world, in terms of geopolitical unrest or an abrupt reversal in the monetary policies of central banks. We must understand a lot of growth in developed economies and, to some extent, in emerging economies has primarily resulted from stimulus. We are yet to see how the growth pans out once this stimulus is removed. Also, there are structural issues with Europe, China and some other emerging markets. In India, the political situation needs to be watched closely.

Will mid- and small-cap companies be on your radar?

During the cyclical downturn, companies in the mid- and small-cap space are impacted more severely. Also, the entire market rally has been driven by foreign inflows that have been chasing 50-70 stocks, while rest of the market was neglected. But when there is an upturn in the cycle, mid-sized companies will be the bigger beneficiaries.

Currently, the entire mid- and small-cap space looks very attractive. The valuation gap between large-cap and mid- and small-cap is fairly large, relative to history. You see, the Sensex touched an all time high, but mid- and small-cap indices are substantially lower than they were. I think through the next five years, this space offers tremendous opportunity.