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BW Businessworld

Uncertain Times

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Global uncertainties have been the biggest cause of concern for Krishna Sanghvi, Head of Equities at Kotak Mutual Fund, who feels the issues involved particularly those surrounding the Euro-zone crisis can have a long-term repercussion on the overall health of financial market and can damage sentiments and reduce risk appetite among investor. Talking to Businessworld's Mahesh Nayak, he feels it's the right time to invest in equities as worst seems to be over for India. Though he sees inflation and interest rates likely to play out in the next 2-3 quarters, he is clueless like many others over global factors like Euro-zone and commodity prices.

Excerpts from the conversation:

Is the worst over for the financial markets? (Globally as well as India)
It is quite difficult to say that the worst is over as the global uncertainties and the issues involved are quite complicated and any near term solution may have longer term repercussions. Equally difficult is to estimate the response of various policy makers on the global front. However on domestic front, we seem to be better placed vis-à-vis the world. We are almost at peak inflation and interest rates and hence the expected moderation in these offers an opportunity going ahead. So in Indian context we are probably at a juncture where in the absence of any major mishaps globally, economy and markets are more likely to see an upturn over next 12 months.

What is your take on the Indian equity market? Are we in a bear market?

Indian economy with positive demography and vibrant domestic consumption offers a unique combination of growth as well as some insulation from the global turmoil. The resilience of Indian economy has already been proven in 2008-09. We believe that this resilience will continue to stay and attract investor attention and allocations from across the world. We do not think that India is in a bear market despite the current volatility. It is more of a consolidation that is emanating from a reaction to global uncertainties and partly a cyclical response to high inflation and interest rates.

Food inflation has seen a sustained rise. Even in this scenario, the RBI governor has already hinted that he may not hike interest rates. How do you view this scenario for the Indian market?
Yes, the food inflation in Indian context has been rising but it is more of supply constraint driven inflation and may take a bit longer to be addressed. The RBI's guidance that it may not opt for further rate hike is partly a function of their expectation regarding moderation in overall inflation (despite high food inflation) going ahead in FY12. Also, it is based on their assessment of the impact of past hikes on the demand and GDP growth.

For Indian markets, the expected pause in rate hike is a positive development. However in the near term (2-3 quarters), we would see moderation in GDP growth (expecting GDP to be around 7-7.5 per cent) as the impact of past rate hikes is felt on the demand. Post the next 2-3 quarters, we are likely to see softening of interest rates and then the growth resuming at higher levels.

What are your concerns for the equity market?
The Indian equity markets are currently impacted by both global economy as well as domestic economy related factors. The key concerns from a global economy perspective is how the sovereign credit issues facing some of the Euro-zone countries will be addressed; and how the losses (if any) will be borne by the investors.  This is relevant as it can damage the investor sentiments and the likely reduction in the "risk appetite". Over a medium term the worries are more about the economic growth prospects in both, USA and the Euro-zone, and its impact on the global trade and the financial markets. Another key issue is whether Euro zone will continue to exist in its present form.

From an India specific perspective, key worries are the high crude prices (impacting fiscal deficit and foreign exchange) and rising inflation and high interest rates (impacting growth).

What is your view on the overall corporate performance of Indian Inc? Till when do you think this dismal performance will continue?

The corporate earnings estimates for FY12 have seen reasonable downgrades over past 2-3 quarters. While the corporate performance on the revenue front has broadly been good it has not transmitted into profits as the profitability has been significantly impacted by the margin pressures as well as rising interest costs for many companies. Post the September quarterly results, we expect some further downgrades to earnings estimates for FY12 and similarly lower expectations for FY13.

The improvement in corporate profitability requires moderation in inflation, lower interest rates and relief from higher commodity prices. We expect the inflation and interest rate to support in later part of FY13 while commodity prices remains a function of global linkages and hence difficult to estimate.

In times of uncertainty where will you advice investors to invest? Currently where are you investing your own money? And why?

Despite all the uncertainties surrounding the world economy, Indian economy, with positive demography and the domestic consumption as the driving force, continues to remain resilient and on track to remain among the fastest growing economies in the world even if we grow at 7 per cent. I think that individual investors should continue to remain confident about this long term growth story of Indian economic growth and the positive effects of it on corporate earnings, equity valuations and market capitalizations. In fact, it is these uncertain times that gives investors an opportunity to keep on accumulating equity assets either through mutual funds or directly based on their knowledge and time commitments. Even on a personal front, my allocation to equity markets (through Kotak mutual fund schemes) continues under systematic investment Plan (SIPs). I believe that SIP is an ideal investment avenue for investors at all times.

 As a fund manager what call will you take on the overall portfolio of Kotak Mahindra Mutual Fund? What will be your short-term strategy in the current market condition?

The near term uncertainties in the economic environment put emphasis on portfolios with a defensive bias. The focus is on sectors/companies that have higher earnings visibility and/or healthy return ratios. Also the bias is on companies that are not highly levered and generating stable cash flows.

As a fund house, we believe in the potential of equity markets creating long term wealth for investors. We believe that Indian economy offers the right growth opportunities to corporate to expand their businesses and create wealth for equity holders. Accordingly we advise our investors to keep on investing in equity mutual funds. We believe that for majority of investors, systematic investment plan (SIP) is an optimal way to participate in the wealth creation opportunity in Indian equities.

In your view what will be the next trigger for the Indian equity market? And why? And when do you see it coming?

The positive triggers for the equity markets are multifold. Globally it is the resolution to the Euro- zone crisis and return of investor confidence. From domestic perspective it is moderation in inflation, commodity prices and decline in interest rates and improvement in investment climate.  Also, there are a few policy reforms that are expected to be unveiled over next 3-4 quarters and these can also act as a trigger. The domestic triggers of inflation and interest rates are likely to play out in 2-3 quarters while global factors like Euro-zone and commodity prices are anyone's guess.