Managing Your Funds

Aniruddha Naha
Associate Director – Fund Management
IDFC Asset Management Company

What is your take on the present investment climate?

The last 10 years have been an easy monetary policy decade for the global financial world, with the developed world going through a slowdown. With the U.S economy likely to be back on track and excess liquidity being tapered, cheap capital in emerging markets will become a scarce resource. Hence elevated interest rates to attract capital could continue in the foreseeable future.

In India, the high levels of inflation and hence, interest rates present a very challenging environment for incremental investments to take place. The Return on Equity (ROE) of the BSE 500 companies (ex financials) is at its 10 year low of around 12.5 per cent, while the 10 year Government security (risk free rate) is trading at a 10 year high of around 8.75 per cent, implying that the excess return for assuming risk of incurring capex is at its lowest in 10 years. In such a scenario, it is very unlikely; one will see a big upswing in the investment cycle anytime soon. 

The amount of money stuck in various projects across sectors is also at  a lifetime high and in such a scenario, it is unlikely that the private sector will commit itself to new capex, till the projects stuck in a dilemma of policy in-decisions and government clearances see the light of the day. 

Across sectors, like cement, steel, power generation, auto, there is ample capacity already in place. Going ahead, promoters will like to see higher capacity utilisations resulting in higher profits, cashflows and return on equity, before committing to new capex.

What is your take on interest rates for CY14? Do you foresee it coming down after considering the recent step taken by the RBI?

The revival of growth in the U.S. and some resemblance of recovery in Europe has raised concerns of inflation coming back. The tapering of easy liquidity ($20bn of tapering has already been effected), will make capital scarce. In India, though inflation is likely to come off, consumer price index (CPI) will still hover between 8 per cent to 9 per cent for the year. In such a scenario, where there is a tightening of global liquidity and elevated levels of CPI, interest rates will at least remain where they are presently. It is unlikely that one will see any cuts in the interest rates in the near future. 

Does the concept of 'buy and hold' still stand true, particularly in the present scenario when sector rotation is happening at such a fast pace?

By mandate, if funds are not sectoral funds, they are diversified funds. Diversified equity funds, by mandate are invested across all sectors and hence participate to the extent. Investing, is about identifying good businesses and staying invested in them through cycles. In case the company identified, is a leader in its space, has seen business cycles and is low on leverage or generates free cashflows, such businesses tend to do well over periods of time, and hence one can 'buy and hold' such businesses. Besides, catching the sector rotation would entail a lot of churn in the portfolio, which is detrimental to the investors in the fund and would also require a lot of luck and timing in exiting the sector which is going out of flavour and identifying which would be the next sector in flavour, which is not always possible. 

What is your take on the present valuations of the India markets?

The current valuations of the Indian markets look expensive because of the depressed earnings profile of the corporate sector. The last three years have seen a sharp deterioration in the GDP growth and the corporate sectors earnings especially in the investment part of the universe. The high interest rates, policy inaction and various regulatory hurdles have completely throttled the capex and execution cycle thereby impairing growth and earning. The corporate sectors earning have a multiplier to the GDP and as the macro environment eases the operating performance of companies will bounce back with great rigor and valuation will start to look favourable. Our focus is on identifying companies which have the business franchise and the balance sheet strength to not only navigate the current tough environment but also have an inherent operating leverage which will help delivering good growth as the economy bounces back.

What is your advice on playing the markets till the General Elections of 2014?

The outcome of the general election of 2014 is anybody's guess. Hence building a portfolio strategy with a general election outcome, which is unpredictable, as a cornerstone wouldn't be very wise. More than the general election, an investor would be wise to keep in the backdrop the macro situation and build a portfolio of good businesses rather than build a portfolio predicated on the outcome of the elections. 

Which are the sectors that you are currently betting upon?

India being a current account deficit country with elevated levels of inflation, will see it's currency continue to depreciate, albeit at a more gradual pace. In such a scenario, we continue to like the exports theme and are positive on information technology, pharma and good export oriented businesses. We also like asset owners, where the mortality risk is minimum, have completed their capex, have sound balance sheets and are waiting for demand pick up. 

Given that capital is scarce, interest rates are high, asset quality is an issue and financials are the most leveraged businesses, we continue to be underweight financials. 

Can you spell out the challenges that the Indian funds industry is currently facing?

The challenge for the India Fund industry is about financial literacy and participation. Investor need to be made aware about the risk reward of various asset classes and the same needs to be mapped to their holding period. Investor exits from the funds before a strategy has fully fructified acts as the biggest challenge in idea implementation. Investors seek confidence and tend to enter funds based of historic returns and very often a mismatch between expectation and reality puts off the inventors from markets in general and getting back their investment appetite then becomes a challenge.

What advice would you like to give retail investors at this juncture?

Retail investors have been pretty savvy when it comes to investing. They have stayed away from the equity markets for a large part of the last five years, which were very turbulent and have made money in other asset classes like real estate and gold. Having said that, inspite of the turbulence, there have been stocks and funds which have performed very well in the last five years. Investors can take exposure to either good businesses through stocks, if they can identify them or invest with equity mutual fund schemes which have generated steady returns in the past three and five years. A systematic investment plan should bode well for the investor, who has the patience to stay invested for the next three to five years.