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Market participants have been keenly observing developments on the political front at home, while those in the Euro zone have made them re-think strategy for most emerging markets. Prashant Sharma, chief investment officer, Max Life Insurance, tells Puneet Wadhwa the economic environment remains challenging but the worst has already been factored in. Edited excerpts:
Are you concerned at the pessimism surrounding emerging markets versus the developed markets, given the macros?
The US and Japan have been doing reasonably well in the last few months. To some extent, this is being driven by the economic recovery in these economies. Japan, too, has loosened its monetary policy and is positioned to buy bonds aggressively. The Euro zone markets, too, have been doing well, as compared to some of the emerging markets (EMs), due to expectations of a supportive monetary policy and reduced tail risk of European disintegration. The growth differential between the EMs and the developed markets has come down, as some of the key EMs are witnessing lower growth compared to the 2006-07 highs and some economies are struggling with macro imbalances.
What about India?
The macro-economic environment is challenging and we have been maintaining this view for the past couple of years. But having said that, the markets are already factoring in a lot of pessimism, which according to me is unwarranted.
India is surely facing a tough economic environment and the macros are perhaps at their worst in the past decade. I believe the economy has bottomed out and could only improve from here. The key is not to get unduly carried away with the pessimism and invest looking at the potential upside that the markets can deliver over the medium term. Indian markets, especially the broader ones, are looking very attractive to us. While there might be occasional corrections, the worst is already factored in.
What is the outlook for bond yields globally and in India?
Each country has its own specific set of factors that influence bond yields. The Euro zone will swing between the risk-on and risk-off modes. As regards India, there is a clear trend emerging that bond yields will fall as inflation recedes. The 10-year bond yield should be around 7.5 per cent in the next few months.
Markets have generally done well, ahead of the general elections. Will this year be any different? Do you think the government will last its full term?
Even as I believe the government will last its full term, there are chances that one of the allies might play spoilsport. Most investors know elections are round the corner. Early elections should not be a very significant investment risk.
Then, why are the markets taking the possibility of early elections negatively and slipping?
The markets seem nervous, given the overall macro-economic numbers coming out. Indian markets have primarily been supported by foreign institutional investor flows, while domestic participation has been much less. Hence, the markets lack depth, resulting in volatility. Markets' reaction to political developments is overdone.
Are they factoring a fractured mandate and the fear of a policy logjam?
Yes, the fear exists. However, whoever comes to power will take the much-needed right steps on economic decisions. Development is an important agenda which most politicians / policymakers have understood. I don't think there is too much reason to worry on this front.
Given all this, how have you managed / churned your portfolio? What has been your investment strategy?
We have been mostly buyers across the sectors that we like. However, in cases where the valuations were steep, we reduced our exposures accordingly. We think the equity markets could give good returns over the next three to four years. Given our expectation regarding interest rates, we have been overweight in high duration of bond portfolio and are comfortable riding that.
You have a decent exposure to banking & financials, information technology and oil & gas stocks. Will you continue this stance?
We like the banking sector and think the valuations are reasonable. Though there might be some concerns regarding asset quality, etc, the valuations are reasonable and reflective of all these issues. The sector will be a key beneficiary of the economic recovery. The possibility of economic recovery in the US and weakening of the rupee against the dollar augurs well for the IT sector. As things stand, it is a relatively safer place to be in. The oil and gas sector has been the biggest beneficiary of the government's reform process and still appears attractive. We have increased allocation to these spaces in recent months and are almost fully invested as regards our cash balances.
What is your contrarian bet at this stage, if any?
One contrarian bet we are planning to take on the positive side is beaten-down stocks in the infrastructure space. The stocks from the broad infrastructure pack, as we would prefer to call it, have been beaten down severely. Once the economy recovers and there is a revival in the capex cycle, stocks from this space will benefit. So, one can start nibbling at these stocks slowly over a period of time.
You also have exposure to Larsen & Toubro, which recently bagged a few orders; so did Crompton Greaves. Would you look at the capital goods sector as things stand? Are fortunes changing for this sector?
I think capital goods, power and infrastructure is a good place to be in. One can start accumulating good quality stocks from these spaces over the next few months because the upside can be significant for these stocks once economic recovery takes place.
What about pharma and FMCG (fast-moving consumer goods)?
We have an overweight stance on the pharma space, with preference for companies with good domestic and global presence. This can counter-balance stress that any segment might be facing. On the other hand, valuations for companies in the FMCG space are steep, given the strong consumption cycle in the past few years. Any earnings disappointment, given the expectations of a slowing in consumption, can lead to de-rating of the sector. I expect the sector to underperform from a three-year perspective.
Is the pessimism regarding autos and metals built into their stock values? Are they on your investment radar?
Valuations in the automobile space have corrected reasonably in the last quarter. We have been avoiding the two-wheeler space for the past few years and maintain this stance. We think given the penetration levels of two-wheelers in India, the potential growth rate of this segment over the long term is limited and increasing competition within the space is also adding to the sectoral woes. We prefer the four-wheeler segment in autos and are reasonably overweight on that segment. The slowing in the four-wheeler market is only cyclical in our view and things will start looking up in a few quarters. Metals is more of a global play. We are not optimistic on the metals pack right now. However, if global growth improves significantly, especially China, we'll look at the sector more positively.
