Samvat 2069 - FM Views

After a long phase of volatility and trading with a downward bias, the Indian market as finally reversed its course. With the new trading year about to begin (Muhurat trading marking the beginning of the new Samvat), investors would want to pick up the right cues to plan their stock market investments for the ensuing year, so that it turns out to be a prosperous new year for them in letter and spirit. If FIIs are supposed to be the strongest force in the Indian market, the homegrown Mutual Funds industry is not too far behind. Big money drives the market, and Mutual Funds are the second biggest investors in the market. Their conviction or the lack of it in the strength of the market can affect its performance. Therefore, it pays to know the mood of fund managers going into the new year. Here, we present the views of fund managers of the top Mutual Funds, which should help you plan your investments effectively going ahead.

Anup Maheshwari, Executive VP Head Equities & Corporate Strategy, | DSP BlackRock

What should be the Equity Strategy till next Diwali?
Should the Government continue the reform process, interest rate sensitive and cyclical sectors will be the biggest beneficiaries. We have increased our weight in Financials, Autos and the Capital Goods sectors. We expect the RBI to cut interest rates in the next two–three months which will benefit these sectors. The Capital Goods/Industrials sector has been a laggard over the past two to three years on account of a slowing economy, lack of infrastructure spending and other issues related to mining, land acquisition and fuel availability. However, with the recent announcements by the Government and the intention to resolve these issues, this sector could be the biggest beneficiary. Reduction in interest rates in the system will be positive for all the sectors mentioned above.

What is the Sensex level that you are expecting till Diwali 2013?
We expect earnings to grow in a range of 13-14 per cent for FY 2014 and believe that the market has the ability to deliver a ~15 per cent CAGR over the next three to five years. Recent initiatives by the Government to revive the economy coupled with interest rate cuts will drive the next leg of growth for the Indian corporate sector.

Which are the sectors you think will be in the limelight and why?
Financials, Consumer Discretionary and Capital Goods could do well should the RBI cut interest rates in the next few months.
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Dhiraj Sachdev, Senior Vice President and Fund Manager, Equities | HSBC AMC

What Should be the Equity Strategy till next Diwali?
We are positive on Indian equities, based on the following reasons and as such, strategy for retail investors would be to increase asset allocation in favor of equities.

• Reversing macro challenges, given some relief in the current account deficit led by lower gold imports and an anticipated crude oil correction. Recent policy decision to reduce the subsidy burden on diesel and capping of LPG is a welcome step in the direction of reducing the current fiscal stress.
• Commodities inflation is expected to decline on account of a slowdown in China and lower growth in the western world. This may have a positive impact triggering margin expansion for the corporate sector and also on the currency (INR). It will give the RBI room for reducing interest rates. Lower cost of capital should hopefully revive capex spending, though gradually (over next 12-18 months).
• Lower interest rates directionally would be the single most important variable for equity markets to rally. This will be driven by lower commodity inflation and a return of focus on growth through an amiable monetary policy.
• Euro area disaster-like scenario seems to be behind us, given the stimulus and ECBs support. Though issues in some corners of Europe may keep resurfacing.
• Valuations (for large Sensex companies) are attractive at close to 13x forward earnings and in the lower range of historic multiples. A large number of mid-caps are available at a significant discount to their large cap peers.
• Structural model for India equity investment remains intact for long term returns. These include a favorable demography, high savings rate, rising incomes, growing consumption demand growth, exisitng low penetration etc.
• Individual companies may excel, which is a case for bottom-up picking. While markets look to be in positive gear over the next one year, it will have to cross hurdles of politics/elections across the globe. We expect the market rally to spread further to mid caps given their relative under-valuation to large caps. Stock selection however remains the key in case of midcaps.

What is the Sensex level that you are expecting till Diwali 2013?
Since our focus is on specific stocks and companies, we do not predict sensex levels. However, given our view of receding macro issues, trending down of commodity prices and interest rate cycle and a large part of global concerns being discounted, there is a high probability of markets testing new highs over the next one year.

Which are the sectors you think will be in the limelight and why?
We are positive on rate sensitive and cyclical sectors like banking, auto ancillary, infrastructure, oil marketing companies and select pockets of real estate. Besides, we like specific businesses like agro processing & crop protection and branded textiles. However, one has to be selective and focus on individual companies based on sustainability of business, valuation attractiveness and cash flows. Broadly, to reiterate, mid-caps as a segment would do well given relative undervaluation versus the large caps.
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Nilesh Sathe, Chief Executive Officer | LIC Nomura Mutual Fund

What should be the right equity strategy that one should adopt till Diwali 2013?
The strategy as far as investments are concerned has to be a fairly diversified one. It will be wise to not depend much on any particular sector. But at the same time, one can give a higher weightage to those sectors that are likely to give better returns going forward. The reforms process taking the front seat after a long hibernation has sent across positive vibes to all sectors. Riding on these vibes there will be ample opportunity for various sectors as a whole in the country to grow. If we look at the huge consumption appetite that India has, consumer durables should be included in ones strategy looking to play in equities. This sector is likely to outperform the growth rates of the other sectors. The second most important sector we believe, is the pharmaceuticals sector. In the last one year it has given better returns as compared to other sectors. It is expected to continue giving better returns as compared to the benchmark index going forward.

What is the level of Sensex that you see till next Diwali in 2013?
When the Sensex starts moving up, everybody starts predicting the index levels. Nobody had thought that the Sensex will bottom out at the 8000 levels, but anyways since it has gone up by around 15 per cent this year, I am quite hopeful that the Sensex will keep up the smart rally and should reach atleast 20000 levels till Diwali 2013. If you are in a position to identify stocks that can beat the Sensex then your overall return can be in the range of 15 to 18 per cent.

Apart from the reforms, what according to you will be the other triggers that will drive the markets?
The movement of the Sensex many times does not depend on fundamentals. As you can see in the last three months what has happened is that, the Sensex has gained around 15 per cent. What has happened for this to happen? Have new investments come in, has the IIP index improved, has agriculture production been better or for that matter have exports gone up? The answer is nothing of the above has happened. So fundamentally, nothing has improved, but foreigners interest in the market has been there. They will invest in economies like Brazil, China or India. Now in that case, if the others are not performing better and the comfort level is not there, India stands to have a much better chance. The net FII inflows have been positive for the last few months and we have seen when FIIs drive the market, it starts moving up and vice versa. So that we see is going to be a major trigger for the market to go up.

What is your take on the interest rate scenario going forward?
Inflation has not been brought under control and the RBI has been asking the government to down inflation so that it can bring down interest rates. But in the last three quarters when everybody was expecting a rate cut, nothing happened. I personally feel that, inflation will come down or stabilise at these levels. Going forward, after Diwali when the agricultural output will be in the market, we will see inflation coming under a check. The impact of crude oil will not be much because it has been moving in a range and as a result the expense on that account will be stable. With the disinvestment plan of the government in place, there is a possibility that government borrowing may come down. The target on this head is likely to be met. These are the factors that may prompt the RBI to bring down interest rates much before than what they are thinking.