Tread cautiously on consumer goods as the risk-reward seems unfavourable.
2012 has seen a 25 per cent gain in the equity market and 50 per cent-plus gains in many stocks. Should investors now sell? We are asking from the standpoint of a young 30-year old investor.
Investments in equity as a proportion of financial savings have reduced considerably in the last five years and it is time for portfolio rebalancing. With macro indicators, including the GDP growth rates, showing signs of bottoming out and structural positive changes in the economy, the visibility of India story doing good over the next 3-5 years is better today than any time in the last few years. From a young investor’s perspective, risk-reward is favourable for investing in equity.
Could you describe two sectors that delivered very good returns for your funds in 2012?
Private banks and cement have been our top performing sectors for the year. We were quick to read the situation on the ailing banking sector and build positions in private banks, which were retail-focused and hence had considerably less asset quality risks over public sector banks. Cement is another sector which helped us through the year. We liked the sector’s ability to cope with a challenging year through stable pricing and improving profitability.
Within sectors, IndusInd Bank and Madras Cement have done well for us. IndusInd Bank, which has about half its loan book in retail assets, has been a key portfolio stock and delivered well on both margins and credit quality. We liked Madras Cements on good capacity utilisation and improving cost structure leading to better company fundamentals.
In 2012, stock markets have rallied 25 per cent. Do you think markets have run ahead of fundamentals? And should one buy?
Markets are always futuristic and discount future expectations. We entered 2012 on the back of extreme pessimism driven by policy logjam, high interest rate and sticky inflation. Market read the difficult phase domestic economy was heading into and acted accordingly. The revival and rally in the second half of 2012 is market’s reading of the improving domestic situation ahead as policy measures, rate cuts guide to bottoming out of GDP growth rate. While the run-up has come a bit too quick, it’s still an attractive proposition from long-term perspective as market is still trading at reasonable valuations in line with the long-term average levels.
With investors chasing defensives in 2012, stocks from sectors such as power, metals and commodities are trading at very low valuations. Would you buy them now?
While metals and commodity in general are tactically looking good after the year’s underperformance, these tend to get a lot more influenced by global affairs than domestic factors. We are watchful and realise that recent positive data from the US and China have the potential to throw up positive surprises. We would look to buy at positive signals and developments.
Power sector is currently a victim of issues relating to policy reforms, along with fuel supply and input cost concerns. While the sector is an inevitable part of the burgeoning infrastructure story in the longer term, we would currently prefer a company-specific approach. We favour companies with better visibility on fuel supplies and operations.
Is this the end of the road for consumer-themed sectors such as FMCG, retail, durables and so on?
India’s consumption story has done well through the last decade and volumes for these companies are likely to remain buoyant in the medium term. However, we believe that the sectors’ current rich valuations capture most of the growth expectations. The sectors could underperform in case of a cyclical rally and hence risk-reward scenario seems unfavourable.
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