Amidst hope that economic growth could come out of its slumber sooner than later, Tushar Pradhan, Chief Investment Officer, HSBC Asset Management, thinks there is a long way to go before a turnaround.
Be it cyclical stocks, rate sensitive ones or defensives, there is nothing much to be optimistic about for the next one year, he feels. Excerpts from an interview:
This week saw good news on macroeconomic front — a narrowing trade deficit and an upbeat industrial production. Are these green shoots sustainable ?
This is not a recovery. Economic growth is on its way down compared to last few years. There is no conducive climate for investments.
Delays in planned projects are leading to a lot of circumspection . If we look at what is going to drive GDP growth, then consumption seems to be the only one.
Given that the fiscal deficit target set in the budget remains, and knowing that we have some non-plan expenditure which is way beyond what was expected, it seems that the manoeuvring ability to spend now is limited. So in that sense, government expenditure is not going to help GDP growth at least till middle of next year.
That leaves us with private investment. This has been absent for almost a year. I don’t know how we can be out of the woods unless these issues are addressed.
Is there scope for buying beaten down stocks in rate sensitive sectors now?
Banking, consumer durables, real estate – all these are driven by leverage and the cost of discounting the leverage ( ie the interest rates) is how you value the sector. It is beaten down because interest rates have gone up substantially.
Only if we think that interest rates will flatten out or fall from here can we bottom fish. This is when the sectors will re-rate.
How much weightage would you give to valuations then? Many of them are at low, single-digit PEs…
There is a danger in taking the price to earnings or price to book value for now. For example, public sector banks have gross NPAs at 5.5-6 per cent on an average. . Aside of the gross NPAs, restructured assets is 10 per cent of the book.
So if I add 10 and 6 per cent together it appears that you have wiped out a significant part of the book. What we are assuming is that the current book value is the real book value and then the price is cheap. So that’s the call one has to take. If you see in the real estate, one of the larger companies is showing a loss for the first time.
The PE that is calculated may be only for FY14. But in FY15, if there is a substantial loss, then the PE equation also does not make any sense. In essence, I am saying we are not at the bottom.
Then would you be more bullish on IT, pharma and FMCG for the next one or two years?
I am not very positive on those either. There is more visibility around the earnings but the multiples at which it is trading is significantly higher than their historical multiples.
If we go back to 2008 when the market was at 21000 points, the one-year forward multiple was 21 times.
Today again we are at 19800 levels, but at a multiple of 14 times. So even if I pay too much for a company or a market, I don’t make too much money. So I have a different concern on companies where there is more visibility.
On the other hand, it is difficult to come to a conclusion that the other companies/sectors we discussed earlier are cheap. So timing is the question.
Here again I have to temper my comment by saying that if you are looking for a longer term view, cyclicals and beaten down stocks are cheap. I can’t say that for a one-year forward. You should have a three to four year perspective.
Would FIIs use the current recovery in the rupee as an opportunity to exit?
If FIIs have close to 400 billion dollars invested in India as an allocation, there is no reason for them to take the money out because it is an allocation.
To give an example, assume I am a pension fund, getting 10 per cent accretion every year on the fund. If I have a portfolio where I have allocated 8 per cent to India. Next year, when I get 10 per cent extra, I am going to buy incrementally enough to be at least be market weight in India.
So the longer-term, long-only funds don’t move out. The interim volatility that we see when FIIs sell – that is driven more by FIIs who come through the ETF route, which have a tactical allocation to India or hedge funds. That’s the kind of volatility that will happen at any time.
HSBC Equity has been an underperformer in the last few years…
The only thing we did differently from others was to take a cash-call in 2009 when markets rallied rather quickly. The legacy is such that we are still carrying it in our performance ever since then.
Today, if you look at the year-to-date performance, we are a second quartile fund.
If you take the three year performance also, we are somewhere in the middle.
If I take each calendar year separately from 2009, then you will see that we have underperformed in only two years in the last five years i.e in 2009 and 2012.
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