Markets ignoring near term risk from earnings

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Markets ignoring near term risk from earnings
India’s inclusive growth story remains intact but markets are ignoring near-term earnings risk. Although the recently announced quarterly results from IT companies showed some recovery and private banks reported continuation of strong growth, one needs to carefully examine the quality of the companies and the valuation of the stocks one invests in. ‘Optimism with caution’ is the undertone of the market, in the wake of global uncertainties, said Nilesh Sathe, CEO and director of LIC Nomura Mutual Fund, in an interview with Ravi Ranjan Prasad. Excerpts:

Equity market has rallied for last three to four months with Sensex around 20,000 mark, what are the prospects in next few months?

Calendar Year 2012 had been very good for the equity market, with benchmark Nifty index climbing over 27 per cent. With the recent policy announcements, we are positive for 2013 too. The Indian market is trading at PE of 18 in line with the mean PE of 18 but, as against the peak PE of about 27 in January 2008.

There is not much participation from domestic mutual funds; the rally is mainly driven by foreign investors’ money and to some extent domestic insurance companies. Do you see risks forward if one invests now?

In calendar 2012, the FIIs had invested about Rs. 1,28,000 crore in the Indian market, against the outflow of about

Rs 21,000 crore from domestic institutions. As a result of QEs (quantitative easings) and LTRO (long-term refinancing operations), investors rush into emerging economies in search of higher yields. We believe that India’s inclusive growth story remains intact. At the same time, ‘optimism with caution’ is the undertone of the market, in wake of global uncertainties.

Will the budget this year be a dampener for the market or will push market further up?

The government has a difficult job of balancing economic stimulus and controlling the budget deficit simultaneously. It is imperative for the budget to deliver on fiscal consolidation in order to maintain credibility, which is needed in order to attract capital into the country. Strict fiscal discipline in terms of Fiscal Responsibility and Budget Management (FRBM) Act will go a long way in restoring confidence of FIIs. The government has already announced many measures required for the fiscal consolidation, like hike in rail fares, deregulation of diesel prices etc. As such, we are hopeful that the budget will also be a positive for the market.

Where do you see the focus for this year’s budget and where should one expect sectorwise some positives in the budget?

The most important thing in my view is how to control the fiscal deficit. The credibility on controlling the deficit shall pave way to monetary easing. To what extent the government can deliver on fiscal consolidation, will be watched carefully by the market. Recent announcements of FDI in retail, aviation, insurance sectors, hike in rail tariff and introduction of direct cash benefit are the steps in the right direction. In our view, the interest rate sensitive sectors like banking, automobile and infra are likely to outperform depending upon the government’s ability to contain the fiscal deficit.

An expected rate cut from RBI in next policy meeting is driving sentiments in the market. What are your views, how much rate cut has already priced in the market?

Low GDP number and low IIP number coupled with low inflation has increased the possibility of rate cut by RBI in monetary policies to come in this financial year. Bond yields have come down by roughly 20 bps across the yield curve during the past 30 days or so. Yes, some rate cut has already factored in, but not fully if one can look beyond this January policy meeting. That the Reserve Bank of India (RBI) retains its credibility, as inflation fighter is more important than short-term stimulus to the market and the economy.

What other risks are markets ignoring right now?

Markets are ignoring near term earnings risk. Although the recently announced quarterly results from IT companies showed some recovery and private banks reported continuation of strong growth, one needs to carefully examine the quality of the companies and the valuation of the stocks one invests in.

Investors in equity mutual fund are sitting on good profit. Which are the equity funds from LIC Nomura MF that have given good return in 2012?

LIC Nomura MF equity funds have given good return in 2012. For the last one year till December 31, 2012, LIC Nomura MF Vision Fund gained by +32.0 per cent, LIC Nomura MF Top100 was up +29.5 per cent, and our LIC Nomura MF Equity Fund was up by +28.4 per cent. I am happy to say that these schemes outpaced the Sensex index performance of +25.7 per cent and the Nifty index of +27.7 per cent during the corresponding period. Smart investors, who stayed with us and/or invested with us during the difficult period, were rewarded with their good patience and smart decisions.

Are you hopeful of inflows from retail investors in your equity mutual fund schemes in 2013? What steps are being taken to attract retail investors in equity mutual funds?

We adopted a three-pronged approach to growth. One, returns to the investors have to be competitive, second, the institutional investors should be focussed and third, the retail base should increase. In order to achieve these objectives, we have put in place robust investment norms; we have recruited specialised fund managers at market related compensation package. We have recruited institutional-sales-head, we have relaunched our flagship product – unit linked insurance scheme (ULIS) with improved features. We have filed for Rajiv Gandhi Equity Savings Scheme (RGESS) product with Sebi. We have introduced toll free number to serve as investor’s helpline. Lastly, we are in the process of renewing our corporate website, which will make existing and new investors easier to understand our products, with various improved features. With these measures, we are hopeful that the inflows from retail investors into our equity schemes will improve in 2013. zz


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