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Decoupled From The Rest

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Though year-to-date foreign institutional flows has been flattish, better FII flows can result in a good rebound, says I.V. Subramaniam, Director at Quantum AMC. 'Subbu' as he is popularly known among market fellow and friends, in his 20 years of fund management has been a conservative fund manager whose biggest regret and concerns for the market all these years has been lack of depth in the market in terms of having a more robust domestic institutional and retail clientele. Though he feels the solution to the European crisis will see a rebound in the near term, but a more benign inflation and interest rates scenario within India could act as a big trigger for the Indian equity markets. Talking to Businessworld''s Mahesh Nayak he strongly feels equity market returns can still give better returns than fixed income, with a caveat that investor may have to hold the security for more than a year. Excerpts from the conversation:   Is this the worst period for the equity market that you have seen in the last 20 years of fund management? And why? I do not think it is the worst period for equity markets, but definitely the situation is grim. The scale of the problem is much larger and monetary institutions are weak in terms of the decisions they take.  There have been periods of excesses in the past as well but this time there is a feeling that the monetary authorities in many countries are looking at quick fix solutions i.e. willing to print currency and assuming that this will solve all problems.   And from a purely Indian stock market point of view, it cannot be the worst period. Our GDP is still growing at close to 7 per cent. India is not linked economically to the western world at the same level as some of the other emerging countries. Therefore any slowdown in the western world should not seriously impact India. However, from an equity perspective owing to capital flows share prices in the short run may be impacted by risk aversion of an FII.   Inflation and high interest rates are not new to India. We had it in the past and managed it quite well. In fact I would say that our central bankers are probably the most skilled in terms of managing inflation. Taking all these factors into account, from an India perspective I do not think that this is the worst period.   Now that we know about Euro-zone and the trouble in the west, how do you see global and Indian equity markets in the near-term to medium-term? (1-6 months) One to six months is too short a period to have a view for. Global investors face more headwinds. They are a nervous lot today and any un-anticipated bad news could lead to a sell off and a sharp decline in share prices. Year-to-date FII investment is slightly negative but the markets are down by 21 per cent. If they begin selling, then the decline could be worse.  Having said that, with Indian rupee (INR) close to 52 to the dollar, there could be a strong reason for an FII to invest now if they expect the rupee to appreciate in the near term.   What are your concerns for the equity market? Are we in a bear phase? And why? I am concerned about the lack of depth in the market in terms of having a more robust domestic institutional and retail clientele. Share prices are significantly influenced by FII flows. Although the savings rate in India is above 30 per cent, very little of that savings flows into equity markets. This to me is a big concern. The Indian investor has gained little in terms of returns from equity compared to an FII.   I think we are in a bull phase, and see significant opportunities for attractive returns from investing in equities. We cannot avoid intermediate declines, but I would not call it a bear phase.   When do you see the equity market rebounding from its lull? What will be the trigger and when do you see it coming? Better FII flows can result in a good rebound. Year-To-Date FII flows have been almost flattish. The trigger for rebounding could be a near term solution to the European crises. A more benign inflation and interest rates scenario within India could also act as a trigger.   How has your interaction with Indian and global clients been? What are their concerns and what are you advising them? Clients in general have been concerned with the impact of high inflation and interest rates on GDP growth. Our view has been that inflation and high interest rates are not new to India. We had high interest rates in the 1990's and that did not stop India from growing at an average of 6 per cent.   Our perspective is that inflation will come down to more normal levels going ahead.   Some investors are also concerned with the policy freeze at the government decision making level. Again, our view is that if corruption led investigation brings about a change in the environment in which  businesses operate and makes the entire system more transparent and clean, then that is a better situation to have. We are less concerned with the policy freeze situation.   Do you see the equity market giving much better return than the fixed income return of 10 per cent in the next one year? And why? Assuming the Bloomberg consensus estimate of EPS Rs 1,324 for FY13 is correct, if we apply a multiple of 17 or 20, the sensex could be anywhere in the range of 22,500 to 26,500 by the middle of next year. This means a return of 33 per cent to 57 per cent. The market for a variety of reasons may choose to ignore the earnings in the short term and these returns may not come true. However, in the long run the markets cannot ignore these earnings. Historically the returns from investing in equity in India have seen a CAGR return of 17 per cent.  Given the growth rate of 7 per cent in the GDP and an inflation of 6 per cent, earnings in India should normally grow by 13 per cent. If we are able to choose slightly better companies then the return, after taking into account dividend returns, should be in the range of 15 to 17 per cent.  Also holding equity for the long term attracts zero capital gains tax, while a 10 per cent fixed income return will attract tax. In all equity returns can still give better returns than fixed income. However the investor may have to hold the security for more than a year.   In times of uncertainty where will you advice investors to invest? Uncertainty can come from market conditions as well as personal situations. Where to invest will depend on an individual's financial goals as well as his risk appetite. The only universal investment rules that I can share are: Do not leverage, have adequate diversification, invest in products that you understand and quiz your financial advisor/distributor on why they are recommending certain products and what commissions do they get for recommending the same. Currently where are you investing your own money, and why? Are you a fan of equity at this juncture? Personally my money goes into our mutual fund (Quantum Long Term Equity fund) on a regular basis, and in case of sharp declines, I add more to my equity portfolio. My view is based on assumptions that I mentioned earlier on equity returns. Given my expectations on equity returns it would be foolish to not be a fan of equity markets. Having said that, equities by nature are volatile, and I am mentally ready for such volatility.   As a fund manager how are you managing the money in your portfolio and where are you investing in this market? The cash in the portfolio is being used to buy and average down the cost of acquisition of certain stocks. Since the beginning of this year, we have been buying some stocks, particularly those pertaining to industries and those that have exposure to the power sector. Some of these stocks have seen a sharper decline since we invested in them largely due to near term negative sentiment i.e. investor worries about policy freeze, the weak finances of state electricity boards etc.   However from a fundamental point of view, particularly when we look over longer time horizons, we find them attractive, hence we have been increasing our exposure to these stocks.   Certain stocks in the consumption sector are still 15 per cent away from our buy limit. If they decline to our buy price, we will deploy cash in them as well.