Improvement In Macro Environment Needed

If you look at the macro environment, you would find that in India it is not on the better side. We have seen a slowdown in the manufacturing sector, which has really made things ugly for FIIs. They have lost heavily due to the currency depreciation and yields too have gone up. Both these factors have resulted in big losses for the FIIs. Some of the people panicked and exited the markets.

Gopal Agrawal 
CIO 
Mirae Asset Management

How do you rate the current investment climate? 

Currently, there are two things that are really divergent. On one hand there are the knowledge-based industries which are benefitting from the recovery in the western world and the depreciation of the INR. While on the other, most governments are saddled with high debts and lower revenue generation in terms of collection of taxes. So capex across the globe is on the lower side and we are no exception to this phenomenon. What also needs to be considered is that, in India, we are facing a slowdown in manufacturing. So if these issues get solved we are certainly headed for interesting times. As far as India is concerned, there are a few positives that I want to highlight. One is the large young population which keeps the structural demand driver very much in place. Also the monsoons have been on the better side. These are the two principal factors which will support India going forward. But to witness good growth, revival of manufacturing is the key. If that happens, then your CAD will come down, and, your currency will stabilise resultantly pushing up GDP growth.

Equity or debt, what looks good right now?

That would depend on the investors and their risk taking ability. It will also be based on the requirement of the cash flows. So, what happens in the fixed income side is that, interest rates have gone up and the yield curve is inverted as the RBI is trying to protect the currency by increasing the short- term interest rates. What I will say is that investors should also look at the credit quality of the portfolio which is very essential at this point of time. If you look at the stock market, what is reflecting in the valuation of the banking sector specially is that, the PSBs are trading at 0.4x to 0.7x price to book multiples. This suggests that people are really worried about the credit quality of the banking sector. In my view, the G-sec bond yield in India will remain high, but it will not remain over nine per cent for a long period of time. So investors should use this opportunity of spiking yield and invest in the long term debt. This is what I would advise.

The volatility levels of the markets have been humongous of late. What do you think is the reason for this huge volatility? 

Volatility in the markets has gone up for various reasons. One is that, we have seen many events happening, especially in the global markets. The Indian currency has depreciated significantly on the fears of tapering of QE, which will impact fund flows. But the Federal Reserve postponing the tapering has seen the markets do a reversal amid high volatility. On the domestic front, the RBI has increased the Repo Rates, which was not expected by the markets; hence this is also a reason for the volatility to have gone up. So, a lot of global events as well as domestic happenings have led to the increase in the volatility.

How do you rate FII activity over the recent past? 

If you look at the macro environment, you would find that in India it is not on the better side. We have seen a slowdown in the manufacturing sector, which has really made things ugly for FIIs. They have lost heavily due to the currency depreciation and yields too have gone up. Both these factors have resulted in big losses for the FIIs. Some of the people panicked and exited the markets. On the equity side, we have to understand that investors are long term by their very nature; we have not seen selling of more than USD 800 to USD 900 million in the recent past. In the month of September we have seen higher inflows. It means that on the equities side people are very confident of the long term growth story of India. 

Buy and hold – does it still hold true – particularly in the present macro-economic environment?  

It is a proper strategy only if you do your due diligence properly and invest. With the macro indicators not very favourable, if you invest in companies that can withstand rising interest rates and also some kind of moderation of demand, then the businesses that have innovative competitiveness will perform better in the long term. As for the businesses depending on the economy and government spending, these are likely to remain volatile as and when a challenging time comes as we are seeing today. So the buy and hold strategy works for those sector that can withstand volatile times.

Your comment on the present valuations 

Our market on an overall basis is not expensive. If you consider an earning of Rs 1300 in the current year and Rs 1800 on a level of 19000, we are close to 15x. It is not high, but what I wanted to share is that the markets are totally polarized. One part of the market is trading at 20 to 40 PE multiple and the other part is trading between 3x to 9x its PE multiple. Investors should not go with the overall PE of the markets. Rather, wealth in this market will only be created if confidence in the economy is back. This is when the stocks trading at 3 to 9 multiple get re-rated it is only then that big wealth will be created. 

Which are the three sectors to invest in right now? 

If you look into our portfolio then you will find that we are overweight on IT, Pharma, Media & Entertainment, and we are overweight on Auto too. 

What is your take on the overall maturity level of the Indian fund management industry? 

The Indian Mutual Fund industry is really evolving. We are not a 30 or 40 year old industry. Rather, it is a good story of 15 to 20 years. But I would say that the Indian fund managers are doing a good job. 

What is your advice to retail investors?

I would like to thank the Indian retail investors as they have shown lot of maturity. I have seen that they are not redeeming at the wrong point which is good. Secondly, they should really stick to disciplined investing and to their financial goals. So, when the markets are falling, they should use the opportunity to invest more regularly in mutual funds. 

This is a challenging time and therefore the valuations and the markets are under pressure but everything does not stay the way it is for long.