Now is the most ideal time to acquire equity assets: Anand Shah

Q&A with CIO, BNP Paribas AMC

With GDP growth dipping to its lowest level in recent years, concerns are being expressed whether one should keep staying away from stock markets as pessimism is spilling all over. Recent surge in key benchmark indices is indicating a bullish undertone. Anand Shah, chief investment officer (CIO), BNP Paribas AMC, in conversation with Chandan Kishore Kant & Jinsy Mathew, says situation cannot get much worse from where it is today. According to him, investors should start looking at investment in equities before it is too late. Excerpts:

Have the markets bottomed out or still more pains left?

Unfortunately at this juncture, one cannot talk about markets independent of the economy. It is still difficult from an economy point of view. But it has nearly bottomed out and I believe it cannot get much worse from where it is today. With recent decline in oil prices, which we believe will sustain to a great extent, fiscal situation will improve from here.

Inflation outlook is still elevated, but it is less than 9-10% which we have seen last year. Further, monetary stance is not tightening but loosening. The only thing which is a question mark is growth. Will it go back to 7% or it stay around the 5.0-6.0% levels? That's the key question. Revival in growth has to be driven by revival in the investment cycle. And the key to kick start the investment process is for the policy makers to remove supply-side bottlenecks. Fortunately there are early signs that the administration is actively working towards this.

So, to answer your question, given the global economic issues it is difficult to say if we have bottomed out but I can say with a reasonable degree of confidence that we are at least quite close to the bottom.

Should we read much into Greece and Europe?
It is fair, indeed important, to keep an eye on developments in Europe without worrying excessively about it. Given our largely insulated banking system and low dependence on exports, we have a very limited direct impact from events in Europe. However, given our reduced forex reserves and increased dependence on foreign capital flows the indirect impact can be material.

But, there is also a significant positive rub-off in the form of lower oil prices and a weak currency. Nothing works better for India than lower oil prices. Also, the depreciation of our currency, which is a natural side effect of any global crisis, is eventually part of the solution rather a problem for us.

On the basis of what you explained, what returns can one expect from stock markets in FY13 and FY14?
Frankly, there is no number to be put. But, can we lose much from here? I doubt it. The stars are aligning well for strong returns over the next 3-5 years. Bottoming out of GDP growth, lowering interest rates, mean reversion effect and attractive valuations (especially in dollar terms) all point to possibility of strong returns over the medium term. The combined positive impact of improved corporate earnings growth and a re-rating in valuations can be considerable.

Of course, its not a given, if we are unable to revive the investment cycle or are faced with political instability then its difficult to visualize sustained returns. But I believe that the odds are in favour of a positive rather than a negative outcome.

What would be your advice to investors at this time?
I believe, it is 'the' most ideal time to acquire equity assets. Without being biased or cynical about the performance of the last few years, if an investor sees the argument dispassionately the investor would very likely come to this same conclusion. If uncertain about the timing, then the investor should spread the investments in equity over a 6-12 month period using SIPs.

Which sectors are top on your radar this year?
In CY11, we focused on consumption, brand power, free-cash flows, risk averseness, leaders, debt free or low debt companies. Now, in CY12 and CY13, these are the times when we will look at de-leveraging stories. We would look to buy companies which are leveraged but are still generating free cash flows from the business and they will get de-leveraged. Across sectors, we are looking for companies which have done lot of capex, increased capacities. For instance, cement; capex cycle has come to standstill. The same goes for power, steel & textiles. If our outlook on a sector is good and we believe a company is going to generate strong operating cashflows we are interested in it. We are also looking at sectors where most of the players are losing money and the cycle is bottoming out, be it aviation, telecom or PSU banks. These are the themes, but the principle remains to buy the best company within these sectors.

Are investors and corporates expecting much from the Reserve Bank of India (RBI)?
Monetary policy has its limitations. The central bank will utilize all its ammunition and still we will not get the desired outcome unless it works along with strong fiscal policy. RBI cannot do the heavy lifting all the time. Greater discipline on the fiscal account is imperative for monetary actions to work effectively. Investors and corporates are right to expect both, the government and the central bank, to work in tandem to turn the economy around. And I believe increasingly that they are.