Monday, July 14, 2014
Those exiting the market now are leaving too early: Saibal Ghosh, Aegon Religare Life Insurance
14 Jul, 2014, 1156 hrs IST, Sanket Dhanorkar, ET Bureau
The government is making the right moves to help bring the economy back on track and restore investor confidence. Addressing structural problems will revive growth and have a positive impact on cyclical stocks, says Saibal Ghosh, CIO, Aegon Religare Life Insurance in an interview with Sanket Dhanorkar.
How do you view the steps taken so far by the new government?
It gives me confidence that the measures seem to be a part of a well thought-out game plan. For instance, when the prime minister took office, he immediately did two crucial things. One, he consolidated the ministries. In the past two decades, coalition politics had slowed down decision-making considerably due to the expansion of ministries to accommodate all parties.
Two, he tried to restore confidence in the bureaucracy to enable it to take faster and bolder decisions. I also see the Budget as extremely practical, pragmatic and commendable. Within a short span of time, the government has managed to address core structural issues—improving the tax/GDP ratio, moving to a more credible fiscal consolidation path, turning around the investment cycle and promoting savings.
When will the initiatives start bearing fruit?
Currently, we are dealing with some deep-rooted structural problems in the economy and unfortunately there is no quick-fix solution. During the recent euro crisis, the German economy stood strong because of the painful reforms in labour markets that it undertook a decade ago. The steps taken today will bear fruit gradually. The first wave of growth is expected to impact the corporate earnings from 2015-16 onwards.
What structural problems need to be addressed by the government first?
Apart from the poor infrastructure, I believe the other big structural problem that needs to be solved is inflation. It is the root cause of many other problems that the economy is facing. If the inflation is higher than the average global inflation, it means we are becoming poorer faster than others. This will ultimately reflect in a weaker currency.
We are used to seeing the RBI defending high inflationary attack but, for the first time, we are witnessing that it is attacking high inflation. This is a dramatic shift. If the government also starts taking corrective actions to address the supply side imbalance in the economy, then I am sure we will win our war against inflation.
How much of a threat does oil pose to the fragile recovery?
Roughly 70% of our oil requirement is met via imports and we have no control over international oil prices. If prices go up, we definitely have a problem. We may need to work towards various energy reforms to boost domestic production to solve this problem.
With multiple PSU stake sales on the anvil, should investors tap this segment?
It all depends on the issue price. If the government leaves something on the table for small investors, then they must go for it. I hope it will work out a good deal for small investors. In terms of the valuation of these companies, we have witnessed some rally in reform-oriented PSU stocks in the recent past. From a long-term perspective, there is still value left, but one will have to be very selective.
How are you positioning your portfolio?
We are heavy on cyclical stocks at this juncture, which broadly means those companies whose earnings depend on a turnaround in the domestic economic cycle. Auto, discretionary, banks and cement will benefit first. The valuations in these stocks tends to overshoot the fundamentals from time to time but, as a long-term investor, we need to construct an active portfolio and stay invested.
This is because the unfolding of structural growth will be gradual and long-drawn. We are also positive on the IT sector. More than currency benefits, the underlying traction in external IT business environment is quite strong and valuations are also not too high.
Is the mid-cap segment looking as attractive as it was a year ago?
When growth comes back, the mid-cap stocks outperform. Besides, large-cap stocks have limitations and do not represent all sectors of the economy. They represent 10-11 sectors, compared with 17 by mid-caps. Also, hopefully, we have put behind us the period of negative credit cycle, high interest rates and investors' risk aversion, the main deterrents to mid-cap stocks' good performance. One needs to selectively build a mid-cap portfolio now.
However, the note of caution here is that one needs a special skill set to manage mid-cap stocks. Remember, high returns always come with high risks. These companies are not well-researched and have poor disclosure standards. I would advise retail investors to take mid-cap stocks through seasoned and professional fund managers.
Several new-generation Internet companies, such as Flipkart, will be coming out with IPOs. How do you view this emerging segment?
These businesses are definitely the future. The question is, how do you price the future? The valuations matrix of these businesses will evolve over a period of time. While there is an opportunity, there is a risk element too.
What is your advice for investors?
Before investing, people should know when they want to take their money out. If this understanding is clear, half the problems are solved. My advice is that we are at a great inflection point and one needs to invest in equity with a long-term perspective.
People often ask me if this is a good time to enter. My answer is that any time is a good time as long as it is for a long time. On the other hand, lots of investors who invested 3-5 years ago are exiting now. My advice to them is that they might be running the risk of leaving a bit too soon.
An investor might feel happy six months down the line if the market corrects by, say, 10%, but five years later, when the market goes up manifold, he will feel completely left out.