Markets can deliver more than 15% returns in 2013: Navneet Munot

Interview with Chief investment officer, SBI Asset Management

Despite the indices jumping about 25 per cent last year, domestic investors continued to eschew stock markets. Most market participants are maintaining their bullish stance for this year, too. Navneet Munot, chief investment officer, SBI Asset Management Company, in an interview with Chandan Kishore Kant, says he is optimistic about a comeback by local investors. Edited excerpts:

Are we heading for one of the biggest rallies this year?
I think the indices would see a new high this year. There is scope for about 15 per cent earnings growth next financial year (FY14) and marginal re-rating of the PE (price-earnings) ratio, which would ensure markets deliver more than 15 per cent overall. The bulk of the gains would be recorded in the first half of the year, though the markets would remain volatile, that is, at the index level. Having said that, I expect several middle- and small-cap stocks, the undervalued segment, to do better and stock-specific returns could be reasonably decent.

Doesn’t the macroeconomic scenario worry you?
While some concerns remain on the macro front, there would be a bottoming out in the macro data, as well as in corporate profitability, in another quarter or so. Another trigger for the market to move higher would be continued action by the government, as some measures are expected to revive the capital expenditure cycle and boost investor sentiment.

What event would have the greatest impact on Indian markets this year?
We have to watch incremental data, the Reserve Bank of India’s actions and trends in corporate profitability. Politics could also play a major role in market sentiment. We also have to watch the global situation.

Last year, global investors participated heavily in Indian markets. But local investors stayed away. Are local investors still hesitant?
I am quite optimistic the year would see a revival in domestic investors’ interest in equities. In the last three to four years, domestic investors were net sellers; this cannot continue forever. At some point, people would start buying stocks and we may see that in 2013.

What makes you so optimistic retail investors would come back?
The market crash in 2008 had severely hit investor sentiment. Interestingly, other asset classes delivered better returns after 2008; asset allocation became too skewed in favour of gold, real estate and fixed income. I think now, there is scope for investors to increase their weight on the equity side because they (investors) are extraordinarily underweight. The share of household savings going into equities is at a 20-year low. An asset class that has a pretty good long-term track record of delivering good returns and one that has beaten inflation handsomely cannot remain out of favour for long. It’s just a matter of time. I think we are reaching that tipping point.

Where would you be investing this year?
Financials, consumer durables and infrastructure would be the segments to look at. I believe interest rates would go down. So, interest rate-sensitive sectors, including financials and automobiles (to some extent), would turn out to be good bets. We also like investment-related themes, as we expect a pick-up in the capex cycle and some push on infrastructure from the government side — stocks in that sector are looking interesting, with a caveat that one has to be vary of the balance sheets in some cases.

What about capital goods, given of late, these are showing signs of revival?
By and large, the whole space — capital goods, engineering and construction — are looking interesting. But we have to be choosy and pick the right kind of stocks.

What sectors are you underweight on?
We are underweight on consumer stables, as there are pockets that have reached over-stretched valuations. Pharma would be more like stock-specific play, rather than sector-specific. We are actually overweight on that sector. We would be marginally underweight on information technology.

Telecom is another sector which witnessed lot of actions. What’s your call on it?
Of course, the stocks have under-performed for a long time now, and this could be an interesting contra bet. In our contra fund, we are playing it as a contrarian call.

Do the retail and aviation sectors look attractive, owing to foreign direct investment?
The problems with some large entities in aviation have made the government look at the sector more favourably. There is potential for growth. However, there are a lot of regulatory issues. We believe considering the potential of the sector and the market cap of the listed entities, there are some stocks that 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 long run, there is potential in the sector and incumbent players would be in a position to leverage on their presence; new global players would surely be eyeing these.