Equities Need To Grow In Strength

There seems to be no let up in the macro environment as it stands today. This has kept the markets overly volatile, resulting in larger uncertainty for investors. David Pezarkar, CIO – Equity, BOI AXA Investment Managers talks to DSIJ about what plagues the market in general and the Mutual Fund industry in particular

What is your take on the present investment climate?

The investment climate of the country is quite depressed at this point of time, which is substantiated by the inflows in the equity markets. Looking at the number of cancellations in folios, the mindset of the retail investors seems to be on the negative side. This is because equities have not been able to deliver the type of returns that investors were expecting. Some of the sectors that investors thought would perform well have not lived up to their hopes. All these things have worked towards building the negative mindset of the investors.

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 month of August was much higher as compared to what Indian markets are used to. This has mainly to do with activities of the two central banks; the US Federal Reserve and the Reserve Bank of India. We have heard about the tapering of the QE, which led to outflows, but, nothing of that sort has happened and this has led to the reversal of the outflows. I do not think this volatility will have any impact on the earnings expectations.

Why haven’t Indian mutual funds been able to come up to a position where they could suppress the pressures exerted by their foreign counterparts?

The Assets Under Management for Indian mutual funds are much lower as compared to the FIIs who are investing in Indian equities. The investment of the FIIs in the Indian equities is to the tune of USD 250 billion as compared USD 30-35 billion of AUM of the Indian mutual fund industry. Incrementally, Indian mutual funds have seen redemptions and they are not getting inflows. However, if you see the amount of money that we invest in gold every year, it is much more than the AUMs of Indian mutual funds. If 10 per cent of that money comes into equities then Indian fund houses can become stronger to withstand any selling by the FIIs.

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

If you are able to identify a sector that is likely to perform better in the next three to four years then the Buy and Hold strategy will hold true. It will depend more on the sector that you are betting upon. If the sector is inherently a cyclical one then you need to have a trading mindset for the same.

Can you comment on the present valuations?

If we look at the valuations at present and at the long term average valuation, then we find that we are trading at slightly lower levels than the long term average PE multiple. We are trading at even more cheaper levels on an EV/ EBITDA and P/BV basis. But you have to consider one thing, the earnings that we have seen in the last few years, have been quite tepid. It is quite natural that the valuations will be below average. The expectations for the next two years will be in high single-digit or low double-digit. The other disappointing point is that, earnings have been downgraded for the past three years. Few quarters back, we were hoping that the RBI will cut interest rates, and as a consequence earnings downgrades were expected to bottom out. But this has not happened. Add to it the fact that earnings have continued to disappoint. So overall, looking at the current valuations and the way the earnings have performed, and keeping in mind the macro environment, we have not really seen a sharp contraction of multiples. The market is not terribly cheap given the fact that we have so many macro-economic negatives facing us.

Which are the three sectors to invest in right now? 

We have an overweight position on sectors like IT and Healthcare. Largely, those are the two sectors that are likely to perform better than the markets in coming times. We have an equal weight position on the banking sector as we believe that the current valuations have priced in the inverted yield curve. We feel that the degree of the inversion of the yield curve will correct itself. Incrementally for the banking sector we are unlikely to see any further bad news. We have an underweight on industrials and energy. We have a large-cap bias.