Saibal Ghosh's interview

Sunday, August 3, 2014

Growth recovery will be gradual, staying invested is important

By Bijoy Sankar Saikia Aug 03 2014

Tags: News

Stock investors who have begun selling may be running the risk of exiting a bit too early in the game, says Saibal Ghosh, chief investment officer of Aegon Religare Life Insurance. In an interview with Bijoy Sankar Saikia, Ghosh says he expects cyclicals to continue outperforming, unless the overall market corrects in a big way due to an unexpected global development. Excerpts:

While FIIs have been the key drivers of the Indian market so far this year, they are said to have almost exhausted their limits on the cyclical and financial counters. Now cyclicals and financials being the running themes of the market, do you expect the growth in the benchmark indices to slow down from here on?

Their exhausting of limits itself suggests that there is a fundamental demand from FIIs for these stocks. However, after the recent hope rally, the valuation gap between defensive and cyclical stocks has become less attractive. Even then, on the current risk-return matrix, I believe cyclicals will continue to outperform unless the overall market corrects big time on account of some unanticipated global event.

Midcap and smallcap stocks have been outperformers over the past two months. While this consolidation of the market bodes well for investors, aren't there many bad apples in this space and isn't there a chance that investors may have ended up buying a few of them in the euphoria? In which sectors do you suggest maximum caution when it comes to picking midcap and smallcap stocks?

When growth comes back, midcap stocks outperform. Also remember the largecap stocks have limitations in terms of representing all sectors of the economy. For instance, largecap stocks represent just 10-11 sectors of the economy against 17 sectors represented by the midcaps. The main deterrents to midcap/smallcap stocks’ performance before the current rally were a negative credit cycle, high interest rate and investors’ risk aversion. Hopefully, these are behind us now. I think one needs to selectively build up a midcap portfolio at this juncture. However, as rightly mentioned by you, a note of caution here is that one needs special skill sets to manage midcap/smallcap stocks. I would not mark any particular sector here, but in general high return always comes with high risk. These midcap/smallcap companies are also not well researched and often come with poor disclosure standards. Therefore, I would advise retail investors to take exposure in midcap stocks through seasoned and professional fund managers only.

How do you look at the June quarter earnings numbers available so far? Do they justify the elevated valuations? Where, if any, stock prices look stretched to you?

As a long-term investor, I do not look at valuations based on quarterly numbers. I did not expect any significant traction in the June quarter numbers, as neither the investment nor the interest rate cycle have yet turned around and the new government doesn’t have a magic wand to quickly fix the deep-rooted structural problems that the economy is facing. The results so far have been on the expected lines. The export-oriented stocks have performed well, while the domestic cyclical stocks are still showing pressures on both toplines and bottomlines, barring a few exceptions.

What’s your outlook on the rupee? While many investors have deserted export-oriented stocks in view of the strengthening rupee, how much does the cross-currency equation matter really?

Notwithstanding the short-term demand-supply situation, fundamentally the rupee will continue to be under pressure till inflation remains at an elevated level against the rest of the world. However, we are positive on the IT sector, as more than currency benefits, the underlying traction in the external business environment is quite strong and valuations are not too expensive.

How have you been playing in the market of late? June quarter shareholding numbers show DIIs have not been buying too much into the cyclicals, a counter FIIs seem to favour. What’s the DII perspective of the market bias?

We are heavy on cyclical stocks at this juncture – by cyclical I broadly mean those companies whose earning strength depends on the turnaround in the domestic economic cycle. At this point, I would prefer to buy higher rocks in deeper sea, which will be the early recipients of the first wave of growth. Typically auto, discretionaries, banks and cement will benefit the first. Despite the fact that valuations of these stocks will tend to overshoot the fundamentals from time to time, as long-term investors we need to construct an active portfolio around these and stay invested. Staying invested is important, as the unfolding of structural growth will be gradual and long-drawn.

When you look at the broader economy, what gives you hope, really? Results of the FMCG companies show weak consumption growth. And inflation continues to loom like a patch of dark cloud. Many companies are still facing strong debt pressure and high interest outgo. Isn’t that a worry for several key sectors? Do you expect RBI to tinker with the policy rates in its August 5 policy review?

It is indeed worrying to see the mounting debt pressure in some of the companies, but if the growth comes back, then it will take care of the situation. For instance, the early sign of growth coming back has already smoothened the asset sales of a few debt-ridden companies. Let us hope for the best here. As for inflation, an expansionary budget, the rise in business confidence, still high inflation expectation and an economy showing signs of recovery will keep the northward pressure on prices. I expect RBI to stay on hold in the policy review.

How would you advise retail investors to take exposure to equities at this stage?

Before investing, people must know when they want to take their money out. If that 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. Often people ask me that whether it is the right time to enter the market. My answer is that any time is a good time, as long as it is for a long time. On the other hand, a lot of investors who have invested three to five years back are now exiting at current level. My advice to them is that maybe they are running the risk of exiting a bit too early in the game. One may be happy six months down the line if the market corrects by, say, 10 per cent, but when the market goes up manifold five years down the line, he/she will feel completely left out.


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