Invest For The Long Run

“Our markets are very shallow and we are a lot dependent on foreign inflows. This is a structural issue for us. I think you have to wait it out and you have to allocate money in equities if you really want money for your retirement. Hence keeping that in mind, it is not a bad time to start.”

Lalit Nambiar,
Senior Vice President & Fund Manager (Equities),
UTI Mutual Fund

What kind of a market are we presently in and why? 

• Worth buying out 
• Worth waiting out 
• Worth selling out

In a market like this, you need to have an investment plan. It depends on the asset allocation plan, expectations of returns, retirement planning, etc. The point that I want to bring forth is that you cannot time equity markets. If you wait long enough, then you will make money. But, the definition of the long enough is a tough one. Sometimes the wait is worthwhile and sometimes it is not. What you need to understand is that, it depends on the macro environment of the globe as well as the country. You are currently witnessing something which is called the deleveraging effect. In the past, companies have borrowed heavily and now that is being reversed. People are trying to reduce their debt burdens and when everyone tries to do that, they try to spend less. In turn, they reduce incomes, so the whole point is that the income should come down at a lesser pace as compared to cutting of debt. Only then will the deleveraging happen. To compensate the effect of this deleveraging across the globe, central banks print money so that the immediate impact is not felt. This creates an inflationary scenario in a deflationary world. In that context, you have equity markets and then there are emerging markets within equities. So, when money keeps on switching (keeping in mind the macro environment) which is bad and the flow of money that is printed by the central banks, two opposing forces are at work. So you are catching both. Unfortunately for us, our markets are very shallow and we are a lot dependent on foreign inflows. This is a structural issue for us. I think you have to wait it out and you have to allocate money in equities if you really want money for your retirement. Hence keeping that in mind, it is not a bad time to start.

On the valuations front, how is the market priced at this point in time? 

In the past, a 14x forward PE was regarded as reasonable enough. Because you had 8x at one point and you have also seen 22x on the other. But there is an issue to it. Unfortunately out ROEs have declined and our fundamentals as a country have also deteriorated. They are not the same as they were few years ago. What adds to the fact is that, if you look at the project execution stats then you will find that it is in a stand still mode. So, this does not augur well for the valuations and you may consider 14x as steeper. Secondly, with respect to earnings, in the banking sector some of the asset values are suspected and you are actually talking about a under-valued multiple where the price to book is higher. With many companies taking a hit on the forex front, the forward multiple may not reveal the real picture of what the actual impact is. Many innovative companies will take the forex hit in the balance sheet and the actual hit may not be seen. But the markets will discount that by reducing the valuations. So, all that put together we are looking at a market valued a tad steeper.

Can you share with us your views on the macro economic situation that we currently are in? 

I think the animal spirit that we have talked about in the past is not visible. On the business front nobody wants to do anything apart from regular capex. Why would you, when you know that there is a new government coming in. So the macro economic situation will take some time before it turns around.

Growth vs Inflation – a huge debate has been happening around this in all circles. What is your view on this paradigm? 

The first thing is that, if the project activity is not happening then growth cannot come only by decreasing interest rates. Interest rates are hiked because that is the only tool that the central bank has at this point of time. Real action has to come from the central government in terms of ensuring that industry can go ahead with their plans. If we are facing a current account deficit then the first thing that we should have done is to renew our iron-ore exports which would have addressed the CAD to some extent. So the debate that comes in is that, what can the RBI governor do? He can only raise interest rates, but what about the supply. The Growth Vs inflation debate is very simple, you cannot bring growth only by cutting interest rates as the other things are not in place. So, we need more action from the government for growth, if it comes, then inflation will automatically go down.

Do you see a turning point in the economic situation any time soon? 

The economic situation will take a longer time to turn around. In the best case scenario considering that a new government will be coming in, it will take atleast two years from now for the economic situation of the country to improve. Markets are likely to turn around much before that. But there is need to have certain factors in place for it to happen. 

Can you share your thoughts on why Indian Mutual Funds been able to be as strong as FIIs are?

What you need to understand here is that where are the FIIs getting their money. Most of their clients are institutional investors. But here the mutual funds are only for retail investors. These retail investors do not know where to put in their money. That is why we have financial advisors and banks and they do all these against a fee. The banks will not show much interest in selling mutual funds as it is not their business. There is a regulatory vacuum. The need of the hour is to pool in the money, be it from the pension funds, or from insurance funds, etc. 

How much of role do you think extraneous factors like geopolitics are playing i n shaping the markets in recent times?

There is nothing like economics. The word is politico economics. Most of the wars that have happened have happened for that only. At this point what is happening is that unemployment has gone up considerably. All major issues are taking root there. Geopolitics is a major concern now.

Can you put a finger on three most investible sectors in the present market. What are the reasons for the same? 

In the next one year we are still good to go with IT and Pharma. The reason behind the same is that there is an uncertainty in the markets and these are the only sectors which provide insulation against this uncertainty. 

Which of the sectors do you think one should be avoiding in the present circumstances? 

At this point I am avoiding PSU Banks and Real Estate. 

Whom would you place your bets on as a person who can bring about a real change in the macro-economic and in turn the market circumstances? 

• The Finance Minister 
• The New RBI Governor 

No comments. 

One advice from your side to investors 

• Retail 
• Institutional – particularly 

FIIs I think as far as equities are concerned retail investors have to stick to their investment plans.