Risk in other asset classes much higher than equity: Sunil Singhania

Interview with Chief Investment Officer - Equity Investments, Reliance Mutual Fund

Sunil Singhania, chief investment officer, equity investments, at Reliance Mutual Fund, is optimistic about the India story, betting highly on equity as the asset class to watch in the days ahead. He spoke to Sachin P Mampatta & Chandan Kishore Kant on the reasons. Edited excerpts:

Equities has disappointed in recent years. What are your expectations in the days ahead?

Our strategy has always been based around the belief that India’s GDP is going to be $5 trillion. Whether in five years or seven, it is definitely going to happen. It’s already close to $2 trillion. Then, you'd obviously like to buy stocks where there is profit growth, volume growth.

But investors seem more comfortable looking at other asset classes, especially physical assets.

We have $14 trillion worth of real estate in the hands of investors. Suppose real estate prices fall 10 per cent. That results in a $1.4-trillion loss. Retail investors own $250 billion worth of equities. To make a $1.4 trillion loss in equities, the Sensex has to go to zero from 22,000 levels, and then again to 22,000 and zero again, a cycle which will have to repeat itself six times before they make that kind of loss.

So, you are saying downside risk is limited?

What I am saying is that the risk in other asset classes is much more. Equity is coming out of a cycle where the worst is behind us. Investors have to look forward, not back.

Gold gave negative returns from 1984 to 2003. That’s negative returns over a 20-year period. Nobody used to look at gold. But those who looked forward bought gold in 2004. If you look at the past five years' returns and buy some asset class, that might not repeat itself over the next five years.

How are you positioning yourself in the light of the elections?

We are not very significantly overweight on one sector vis-à-vis the other. We still continue to have significant exposure to IT (Information Technology) and pharma (pharmaceuticals). On the FMCG (fast moving consumer goods) side, except for the spirit side, we believe most of the FMCG companies are aggressively priced, more so given their recent low volume growth. We have exposure to banks, to capital goods.

What is your outlook on mid-caps?

We have played a lot of emerging themes such as chemicals, building materials, the e-commerce and the retail theme. One good thing is that we are 15-20 years behind China, maybe 50 years behind the US. So, we just have to see what has happened there and relate it to India. Some themes might happen in 10 years, others in 20-30 years but it is going to happen.

An example of this in action?

We are the largest holder of India’s largest spirits company. The market capitalisation of cigarette companies in India is $50 billion. The market cap of spirits companies in India was only $2 billion . Anywhere in the world you go, the market capitalisation of spirits companies is multiples of cigarette companies.

And, it is the reverse in India?

Significantly so. There is a logic why the market capitalisation of spirits companies is higher. Globally, consumption of cigarettes is falling in volume terms, including India. It is banned in a lot of places. The government is very, very critical of cigarettes because there is a direct correlation with cancer. Alcohol, on the other hand, is a growing business. In India, it is growing in double digits...

Do you see signs of definite improvements from a fundamental perspective?

The macro economic factors are all turning positive. Earnings are already up 16 per cent among companies which have declared their results, one of the highest in three years. We are looking at a decisive mandate irrespective of the party which comes to power, so we will have another strong push towards getting things done. Companies are coming out of a cycle where they have not spent money, and they are now looking at spending money. Hopefully, now, after a lag, interest rates will start to come down.