The market remains inherently bi-polar and keeps swinging from extreme optimism to extreme pessimism. Currently the Indian market is quite pessimistic and gives the rational investor a good opportunity to buy good stocks cheaper valuations, said Gautam Sinha Roy, fund manager, Motilal Oswal Asset Management.
In an interview with Sourabh Pandhare, Gautam Sinha Roy said, "We continue to take benefit of lower valuations to invest in equities through our in-house approach to stock picking. I believe the lower levels will help rake up higher returns on investments made at current levels over the next few years."
1. Recently Indian stock markets touched 20-month low amid concerns over correction in Chinese markets fueled by slowdown in the second largest economy. What is your take on recent correction? Is the fall in the Indian markets justified/ excessive?
Today, the outflows of global risk capital from emerging markets are a worry. While India is fairly insulated from the global growth challenges, our market is suffering collateral damage from the liquidity outflows from global risk assets. As long term investors in Indian markets we are seeing the macro climate to improve and valuations to become more reasonable. Of course, there is an outside risk of a sharp correction in markets driven by global liquidity. A large part of India's growth is from domestic demand and is structural in nature. So any sharp corrections are interesting opportunities for long term investors. Albeit, valuations at ~15X forward PER are also reasonable, thereby limiting the downside (vis-a-vis 2008, in case of a global liquidity shock).
2. Steep decline in oil and depressed commodity prices are helping Indian economy. But at the same time, fall in prices impacting energy and resource companies and their respective stocks heavily. Does equity markets need higher oil and commodity prices at this point in time for staging a bounce back from current levels?
From 2009 to 2013-14, pumping of liquidity from developed market central banks was raising risk asset prices globally. While this did help raise the valuations of many Indian stocks, it had a major collateral damage on the country's fundamentals. This was because commodity prices remaining artificially inflated leading to high inflation, CAD and Fiscal Deficit for India. Now as the US Fed raises rates and curtails liquidity, we are seeing an unwinding of excess valuations across risk assets. A slower global growth is making the world adjust to new normal in many commodity prices- like crude oil- which helps India decrease inflation and improve its fiscal position. While commodities and emerging market equities as asset classes do tend to move in tandem, we believe the benefits of lower commodities outweighs the concerns. Even the incremental negative impact on Index earnings decreases as commodity prices start to stabilize at a lower base. It is a matter of time, by when hopefully commodities would have settled at their new lower levels and hence would stop mattering from an earnings change perspective.
3. What is your initial reading of recently started earnings season? What is your expectations on overall third quarter earnings season?
While it is early days yet in the current earnings season, the initial earnings have been very encouraging, especially the contribution from Index heavyweights including Infosys and Reliance. A lot of the disappointing results tend to be more back-ended in the season. Net-net the earnings trajectory should be similar to the past few quarters with sectors such as automobiles, select private banks, select consumer stocks, downstream oil & gas and technology driving earnings growth while PSU banks, metals & mining, upstream energy, infrastructure etc. dragging index earnings growth lower. However, this is the quarter when we have a lower base in earnings in the same quarter of last year. So, that should help and hence we can expect a very modest growth in earnings.
4. When do you see marked recovery in corporate earnings performance? What factors affecting profitability of companies?
There are essentially two major factors which have to be in place for earnings growth to start recurring. Commodity prices need to reach stable levels and remain there so as not to impact the commodity companies earnings negatively. Secondly, the favorable macro in the form of lower inflation and interest rates should reflect in stronger broad-based demand growth across sectors, the early signs of which are visible. Also, a recovery in the corporate capex/ investment cycle as well as the real estate sector, however unlikely to happen in the near term, could act as a major boost to earnings of the industrials sector as well as the banking sector.
5. Budget session will start next month. What is your expectations from Budget? Do you think Budget will be next big trigger for markets?
We do not as yet expect the Budget to act as a major trigger for the market. For now, liquidity issues and earnings trajectory overshadows everything else as far as market direction is concerned.
We expect the Budget to further tighten the fiscal deficit trajectory given lower subsidies and improving indirect tax collections; while promoting spend on capex and infrastructure investments. Tax sops to encourage broader consumption revival could also be on the cards. The rural side of the economy is under some stress due to erratic monsoons these past two seasons. There could be some extra focus to support the rural economy.
6. Foreign investors net inflows fell more than 80% in 2015. Do you think lack of FII participation will continue to haunt markets in 2016?
As QE seems to be finally over and we are in a rate hike cycle in the US, markets will have to learn to live with much lower levels of FII inflows. I will not be surprised if the ownership of Indians in Indian equities starts inching up going forward. Only caveat is that this is assuming there is no restart of the QE program.
7. How are you approaching the markets? What kind of allocation are you making towards different asset classes?
We continue to take benefit of lower valuations to invest in equities through our in-house approach to stock picking. I believe the lower levels will help rake up higher returns on investments made at current levels over the next few years. It is always a good idea in equities to be greedy when the market is fearful. Hence, we are invested in the funds in equities mostly.
8. Does current levels prompting you to buy stocks at cheaper valuation?
Yes, definitely. As stocks in our portfolio become cheaper, many of them are very attractive at current levels. As the investing masters have explained- the market is inherently bi-polar and keeps swinging from extreme optimism to extreme pessimism. Well, currently the market is quite pessimistic and hence gives the rational investor a good opportunity to buy good stocks cheaper.
9. According to you, which sectors look attractive at current levels?
I am finding the same sectors/ stocks which I own to have become more attractive. As investors, we are oriented first towards the inherent quality of the company and its growth with valuation being the following factor. So we do not look at stocks favorably just because they have become 20-30% cheaper, unless the underlying businesses are also great. My portfolio continues to be concentrated in automobiles, select private banks, select consumer stocks, downstream oil & gas, pharmaceuticals and technology.
10. Which sectors are you avoiding at this point of time?
I continue to remain out of the metals and mining space, the entire industrials and infrastructure space, and the broader PSU banking space.
11. What is your advice to investors at this point in time?
Investors who are already invested in equities should keep the faith and remember not to be swayed by the manic-depressive nature of markets. Of course they should make sure that they are invested in the right funds and in the right set of stocks. The near term can be quite nerve-wracking. As long term investors, treat this as an opportunity to create an investment portfolio which will be your golden nest egg. Hence even if the pain period lasts for quite a while, the opportunity window to create the nest egg is that much higher.
12. Would you recommend any specific fund to investors?
As specialists in Indian equities, Motilal Oswal Asset Management offers three equity oriented investment Mutual Funds- MOSt Focused 25 for large cap investors, MOSt Focused 30 for Mid cap investors and MOSt Focused 35 for sector-agnostic investors. We also have the MOSt Focused Long Term Fund which is our ELSS product. Between these funds, we have opportunities for all classes of investors to invest in Indian equities.