Q&A: J Venkatesan, Fund Manager, Sundaram Mutual Fund

'Markets will see more volatility in the short term'

J Venkatesan, fund manager, Sundaram Mutual Fund, shares his views on market direction, investing themes and valuations in an interview with Jitendra Kumar Gupta. Edited excerpts: 

What do you think is the incentive to stay invested in the equity markets at a time when banks are offering 10-11 per cent on deposits? 
While it is true that banks offer a higher interest currently, one should look at equity as a long-term wealth generating asset class. Many companies generate higher return on equities and are available at attractive price-to-book multiples and hence in the medium to long term, equities would definitely score over bank deposits. Moreover, equities are more tax-efficient on a long-term basis.

Your view on markets given the recent correction on back of rate rises? 
We remain cautious on the market in the short term, as higher inflation and interest rates continue to impact the economy, resulting in GDP estimates being downgraded to around eight per cent. We believe inflation might come down and IIP numbers would start moving up in the second half of this financial year, mainly due to the base effect. The market will see increased volatility in the short term as QE2 comes to an end in the US and globally some money is moving from emerging to developed markets. Having said this, Indian equities on a medium to long-term basis are still looking attractive after this correction.

What is your take on corporate earnings? Is there any downside risk to the earnings? Could we see the downgrades happening in the coming quarters? 
Corporate earnings on an average would grow by around 18 per cent in FY12 and FY13. Earnings in the immediate quarters could remain subdued due to concerns on margins on account of high commodity prices and there could be minor downgrades. But as underlying consumption demand is not slackening, we think on a two-year average basis, 18 per cent growth is more likely.

How have you positioned your portfolio given the concerns over high commodity prices and interest rates? 
We have moved into defensive sectors like consumer staples, telecom and pharma. We believe the consumption story in India is still strong. Especially, the demand from the rural side of the economy would continue to surprise, as income levels have gone up. We also like banking ,as the earnings growth would be good, despite the compression of margins due to improvement in loan- loss provisioning costs as compared to FY11. We are having neutral weight in the technology space, as they would remain beneficiaries of global growth going up. 

Which sectors are you avoiding at this point? Will you include rate sensitives in this list? 
We would avoid sectors such as real estate. We would watch for growth in the order books for the capital goods sector to happen before adding weights in the portfolio. We are underweight on oil and gas as we look for more reforms and more clarity on the growth plans of the companies in the sector.

What is your view on market valuations? Does it gives you comfort that mid-caps are trading at single-digit price to earnings multiples? 
The valuations of the markets are at around the long-term average levels. They are not at euphoric levels to call for steeper correction in the market. Given the healthier earnings growth rates in the next couple of years, the market would look attractive to any long-term investor. 

Midcaps underperformed large caps since November 2010 by about 10 per cent or so. But on a longer-term basis they outperform large caps and they look cheaper to large caps at the moment.