Interview - Saibal Ghosh

Thursday, May 14, 2015

Do not try to time the market, believe in India growth story: Saibal Ghosh, AEGON Religare Life Insurance

By ECONOMICTIMES.COM | 13 May, 2015, 05.02PM IST

Emerging market funds are hugely overweight on India, but there could be a repercussion of likely interest rate hikes by the US Federal Reserve (Fed) later this year, feels Saibal Ghosh, Chief of Investments & Business Development at AEGON Religare Life Insurance. In an interview with Amit Mudgill, Ghosh says he is bullish on select quality stocks from banking, auto and industrial sectors. Excerpts: It seems that equities have entered a bull phase across the globe. Be it Japan's Nikkei or UK's FTSE, Chinese CSI300 or US' S&P 500, the momentum is quite strong, but why? Is it the recovery in the US that is fuelling global markets? If yes, then for how long?

Saibal Ghosh: Part of it may be due to the US recovery, but I believe that largely it is because of excess liquidity in the system. Post the financial meltdown, we are now running the 7th year of unprecedented expansionary monetary policy that the United States and the central banks of other developed economies have adopted. I believe the first asset class to rally in a cycle is always developed market sovereign bonds, followed by emerging market bonds and then equity and other riskier asset class. However, the sequencing of the cycle may not always plays out in this order depending on market dynamics and relative value proposition of each asset class from time to time. The current equity rally that you are referring to, I believe, is falling more in this liquidity-induced cycle only. The liquidity is pretty strong, thanks to sustained stimuli by the US, Japan, China and other major geographies. That said, marketmen feel that the US Fed will start hiking interest rates anywhere between September and December this year. What risks the event poses to emerging market equities, especially to India?

Saibal Ghosh: We have never witnessed this magnum of liquidity in history. Therefore, it is difficult to say what will be the repercussion in the event of this unprecedented liquidity being withdrawn, albeit gradually. The Fed is also aware of this risk and therefore it is giving enough notice to the market to absorb the news. But deferment of inevitable is not the solution to this problem. Besides, it is not only the US rate hike, but the dollar strengthening is also doing damage. As a result, we are already witnessing yield hardening in some of the emerging market bond yields. However, our bond market is insulated beyond a point as FII holding in Indian bond is capped well within an acceptable limit.

As specific to the Indian equity market, I believe that there will be some pull back effect for sure as Emerging Market Funds are hugely overweight on India (to the extent of more than 400 bps) besides holding of all FIIs put together is reaching half of entire free float available in the market. Having said that, I also believe that equity investors finally chase growth and there is not much alternative to India in the globe at this point. Therefore, there will be some pull-back effect, but the down side of the Indian equity market will hopefully be protected. Foreign investors have taken some profits off the table. It seems that a likely less-than-expected earnings could trigger further selling by the institutional category. But, at the same time, buying is visible by the domestic institutional investors (DIIs). Would this buying sustain? What is making DIIs so positive on domestic equities? Are you bullish? What are the pockets that attract you the most and why? Anyways, it looks as if the 'hope rally' is over and the reality has checked in. Bouts of selling are observed on each rally, suggesting investors are unlikely to give higher valuations to stocks of companies with no meaningful recovery. When will things change?

Saibal Ghosh: We, as fund managers, need to recognize the direction of the market rather than trying to ride every market wave. Directionally, I believe this is just the beginning of a fresh cycle where the equity portfolio needs to be designed to reap most benefits as a result of economic upturn. It is also not unusual that in an up-cycle such as this the market tends to overshoot the fundamentals and correct from time to time. We are long on quality stocks belonging to Bank/Auto / industrial sectors, which will be the biggest beneficiaries in the event of the economic cycle turning positive.

As far as the timing of recovery is concerned, I think this time it would be infrastructure spending-led recovery and may take time. Let us take an example. Almost 15 lakh crore will be spent on railways and roads only in the next 5 years. The effect of such spending to economic growth and its consequent impact on corporate earnings will be gradual and may be back ended in some cases. Therefore, recovery may not happen the way market would like to believe and risk to FY16 earning downgrade will remain an overhang. But then we have to recognize the long-term trend and stay invested amidst market volatility. It seems wise for small investors to make the most by parking their investable money with professional fund managers. But, if a small investor wants to invest on his/her own, then what things he/she could look at before picking individual stocks?

Saibal Ghosh: The management of funds is best left in the hands of professionals. However, if one wants to invest in a stock on one's own, then my advice would be to stick to the most basic fundamental rule. And the rule is simple: do not invest in a stock that you do not understand. Even as we have seen a couple of IPOs hitting the Street, the primary market is yet to take off. Why is the activity so lackluster? On the flipside, we have seen a flurry of qualified institutional placements (QIPs) by a number of companies. Latest to join is Yes Bank BSE -0.11 %, which has announced to raise up to $1 billion via the QIP route. Does it reflect the upbeat India Inc, institutional investors? What cues retail investors can take from companies coming up with these QIPs?

Saibal Ghosh: The output gap is still negative in the economy and a big recovery is not yet in sight. As a result we are not seeing a rush to mobilize the funds by corporates. However, the anecdotal suggests that quite a number of cooperates are lining up to hit the market in the rest of FY16. But the issuers also need to understand that the primary market flourishes when retail investors make money from investing in the primary market. Unfortunately, the issues are so finely priced nowadays that there is hardly anything left on the table for small investors to earn a good return. What is your take on the government's divestment target for FY16? Things have improved a lot. The steep fall in crude prices, though some recovery has been observed of late, has improved the government's finances. It is unlikely that we may see some distressed selling this financial year. If RCF's recent OFS is any signal, then demand for PSU papers looks quite strong. What is your view?

Saibal Ghosh: We believe that the present government can fulfill divestment targets. Hopefully unlike last year the divestments will not be bunched up towards the end of the financial year. Divestment of the Coal IndiaBSE -0.07 %ONGCBSE 1.17 % and SUUTi stocks can help achieve a major part of the target.

Can you tell us where you see the Sensex/Nifty by end-December or FY 2015-16? What are the sectors that will help the benchmarks reach the targets? Any contra-sectoral bet that you would like to make?

Saibal Ghosh: I firmly believe that as a fund manager our job is not to predict the market within a timeframe, but to recognize the cycle and outperform the benchmark over a longer period of time. We will continue to be over-weight on cyclical stocks. This is also a cycle where future multi-baggers are in the making where, we also need to identify those potentials, be patient, and stay invested amidst market volatility. If you were given Rs 100 to invest in, where would you have put that money in, given that you are dealing with a moderately risk averseinvestor? Share with us your investment rationale.

Saibal Ghosh: Assuming that this is long-term money, I would invest in diversified equity fund, as equity is the best performing asset class in the long run. In case the time horizon is small (1-2 years), it would be 50-50 between equity & bond Funds. Any word of advice for investors?

Saibal Ghosh: When the cycle changes, after the initial euphoria settles down, the market could turn extremely volatile and at times may get further aggravated by external factors. Do not try to time the market, believe in India's growth story and stay invested. Remember the saying that any time is good time as long as it is for long time.


Retrieve A Quote