Bottom-up style of investing can give big returns

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Bottom-up style of investing can give big returns
Since 2008, Sensex earnings has grown 48 per cent compared with 26 per cent returns in CY12, says Gopinath Natrajan, CEO of IIFL Mutual Fund. In an interaction with Ravi Ranjan Prasad, he said it is not fair to just go by the broader index number, instead investors should look at oppo­rtunities backed by structural shift in economic and demographic trends while investing in dom­estic equities. Excerpts:-

The equity market is at a two-year high. What should investors do in the New Year. Could you suggest pockets that are still open for investors to reap good returns?

India was one of the best performing markets, delivering 26 per cent returns in CY12. If one were to increase the time horizon, benchmark index has actually delivered very little since 2008 on a point-to-point basis, while Sensex earnings has grown 48 per cent from Rs 833 to Rs 1,230 (FY13E) during this period. Also, within the index, some segments of the market like FMCG is pricing in optimism while others like infrastructure might be pricing in fear. So, it will not be fair to simply go by the broader index number. Instead investors should look at opportunities backed by structural shift in economic and demographic trends. One such theme is consumption and we feel in spite of healthy returns over the past two years, consumption stocks may continue to outperform as companies witness structural change in consumer behaviour. Oil & gas, an index heavyweight, can be anot-her key sector to watch out, if the rece-nt noise about policy changes gets converted into action. Overall, we expect this year to favour stock-pickers and direct investors should use a bottom-up approach to generate superior returns.

Last year’s market rally was driven more by foreign money. Do you see risks for domestic investors who are now trying to put money in equities, given the higher valuations?

We are not very surprised by FII interest in the Indian market given that most trend indicators like GDP, demographics and size of the market are pointing towards significant long-term opportunity. Valuations are no longer as cheap as they were in the beginning of 2012, but at one-year forward PE of 14 times (FY14E), we are still not very expensive given the historic range and earnings growth. Also, if you dissect the index, there are lots of pockets like consumption, IT, oil & gas, pharma and banking which have the potential to deliver double-digit returns going forward.

What do you think is the reason for the apathy of domestic investors towards equities, when they are investing in gold and real estate in a big way?

Historically, domestic retail interest comes in with a lag and also lackluster equity returns over the past two years have not helped in garnering investor attention. Monetary policy easing around the world coupled with fear of sovereign defaults and local currency weakness kept gold prices high, making it one of the best performing asset class in the past few years. Lack of quality primary equity issuances is another prime reason for the absence of retail investor. We expect domestic investor interest to improve with market momentum sustaining.

What are your expectations from the earning seasons that kicks off with Infosys on January 11?

We expect Q3 to be another weak quarter in line with market expectations. The market will continue to closely assess the overall operating environment and start discounting FY14 estimates. Overall, this quarter may also continue with weak top line growth, while overall margins for index companies may start stabilising. But good news from the market’s point of view will be that earnings estimates may not see further downgrades or at least the pace will come down significantly. But all of this is subject to sustaining policy momentum and global stability.

Has the market factored in the earnings season expectations as well as the possibility of a rate cut by RBI on January 29? What does this foretell for the interest-rate sensitive sectors such as real estate, infra and banking?

I think there is a consensus in the market that 2013 will see repo rate cut anywhere in the range of 100-150 basis points. Difference of opinion, if any, is on the timing of such a move. Investors should not worry too much about timing and instead focus on the overall trend, which is favourable for equities. Financials, especially wholesale-funded institutions, are likely to be the biggest beneficiaries as cost of funds falls. Infrastructure, though a beneficiary of lower rates given its capital structure, is more dependent on government policy momentum and can give disproportionate returns if confidence returns.

In the mutual fund space, what type of funds are good for small investors to invest in? Should people go for equity or debt funds?

Since most asset classes are intrinsically cyclical in nature, retail investors should focus on a proper asset allocation strategy. Mutual funds offer various types of schemes under different asset class viz. equity, debt and gold. All of these have varied risk-return trade-offs and investors need to keep this in mind during the allocation process. Under equity, investors can look at diversified equity schemes, ETFs/index funds and equity-linked savings schemes. In the debt space, investors can look at fixed maturity plans, income funds (short-term, dynamic) and liquid funds.

How mutual funds are gearing up for the Rajiv Gandhi Equity Saving Scheme?

The Rajiv Gandhi Equity Saving Sch­eme was proposed in the Union budget 2012-13 to encourage flow of savings into the equity market. A new retail investor having annual income less than Rs 10 lakh can avail tax benefits through new Section 80CCG by investing up to Rs 50,000 and 50 per cent of the amount invested can be claimed as deduction. The holding period of such eligible securities is three years with a one-year fixed lock-in period.

What are some of the important global and domestic cues to look forward to in 2013?

We expect 2013 will be a very interesting year both domestically and globally as investment climate stabilises and some confidence returns. Though principal drivers (domestic) of market returns will be falling interest rates and softening of inflation, investors need to keep an eye on current account deficit & fiscal health as well. Markets have cheered a speedy resolution of US ‘fiscal cliff’ but fast approaching debt ceiling issue may keep investors nervous. 2013 will witness the continuation of painful deleveraging process across developed economies. zz


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