ET Now: The big picture is that macro is looking slightly challenging, money is moving out of the markets and crude prices are refusing to come down.
Prasun Gajri: Yes, the macro is clearly challenging and that is what is reflected in the way the rupee
has been behaving. So that is a clear indication that any capital
inflow or outflow, which happens very quickly, can lead to a large
change in the way our macro is positioned. So that has been a problem
for a while, it is just getting accentuated.
ET Now: Is it a time now to hunker down all the recovery expectations?
Prasun Gajri:
If you are looking at current account that is a challenging problem,,
which is not going to go in a hurry. Clearly, one can argue whether it
is $80 billion or $90 billion, but we have to fund somewhere to the tune
of $80 to $90 billion every year at least for this year and that will
require reasonably benign global flows. Therefore, that problem remains.
On the fiscal side, while the intentions from the government do seem to
indicate that they want to control the fiscal at 4.8% of GDP, it is going to be a very tough challenge given the slowdown in the economy, the tax numbers for the first two months, little progress on the disinvestment, and food security bill.
Inflation definitely seems to be under control. So that is one big positive which has emerged. Interest rates
have not really moved up too much despite the rupee cracking. So that
correlation between the rupee falling and interest rates also rising
seems to have broken down a little bit over the last few days. Tat is
something which is again a positive sign.
ET Now: The argument for Indian equities
at least for next one year is not very constructive and given the kind
of macros we are working with looks like that we could be in a range for
another one year?
Prasun Gajri: We
could be in a range for another one year. I do not think there is too
much debate about that. For the markets to really move out of the range,
something has to happen either positive or extremely negative. So I
would agree that the range is there, but having said that what sectors
do well and what do not may not necessarily follow what has been
happening in the past and that is going to be something which could be
different.
We saw some outflows in June, but that was hardly
anything compared to the inflows which we have seen this year and in the
earlier year as well. So if they sell what they own then clearly some
of the stocks
which are at very high valuations will not do so well and some of the
stocks which are at completely beaten down valuations may sustain. So
clearly what outperforms, what underperforms is something which remains
to be seen.
The market today is in a complete risk off mode
where we continue to give higher multiples to sectors where the
fundamentals are clearly deteriorating, but the valuations are higher
than what they were 12 months back and there are some other sectors
where the fundamentals are clearly weak, but the valuations are just
getting beaten up every single day. So clearly that dichotomy may change
over the next 12 months, especially if you see FII outflows and ETF
outflows from the Indian market that is something which may undergo a
change. So the nature of what performs in the market or does not perform
in the market could be interesting.
ET Now: Do you
expect that Q1 numbers will be rather noisy given the way how the rupee
has moved for the quarter gone by, what has happened to bond yields and
commodity prices?
Prasun Gajri: See
there could have been noise, but the fact is that the rupee movement
does not tend to appear in the P&L given the way the accounting is
done. It tends to go into the balance sheet, so it does not necessarily
make it all that noisy. Having said that, I do not think there are any
great expectations from this quarter. Most people anticipate virtually
zero to very-very low growth for this quarter. So we are not really
building in any major positive surprises. The interest rates have moved,
that is something which has been the case for a while. So I do not
think that really clouds the things, but overall no major expectations
from this quarter.
ET Now: So what could be the next big trigger because you are sounding more bearish than bullish to me?
Prasun Gajri: If I have to talk about the economy
it is a more balanced view where we will see probably better growth,
but structurally the economy needs to get back to 7-7.5% growth. We will
be stuck around 5.5-6% for a while if we do not change that. On the
market, clearly the market is bipolar while the valuations may look
reasonable from averages perspective, there is a part of the market
which is completely trading at the lows post the global financial crisis
and there is another part of the market which is trading at all-time
highs in terms of valuations.
We are seeing a relative
slowdown. Obviously these categories are still doing well, there is a
relative slowdown, but do the valuations really justify that? That is
something which will remain to be seen and second aspect is if there is
actually a sell off in the Indian equity markets from the global investors, I guess the stocks
which will be more vulnerable are the high valued stock. So I do not
have major expectations from this market. I don't think that it can give
me a very high double digit return this year, but you could actually
make reasonable returns if you get your sectors right.
ET
Now: If you are of the view that one should still be buying into high
beta and one should not get obsessed with quality, what are the options
which are left?
Prasun Gajri: No, I
am not suggesting either of the two strategies. One has to follow a
balanced approach. I do not think it is a market which has helped being
in high beta very clearly, but having said that it is not a market which
is always going to help being in quality. So that is a distinction one
will have to start making at some point of time and have that balanced
approach to the portfolio.
If you look around, I cannot get
into specific names, but there are enough stocks which are trading at
post-2008 lows with may be weak fundamentals, but they are not as bad as
being made out. So it is a stock-specific market, it is easy decision
to be safe today. It is a safe decision from a fund manager's
perspective. It is an easier decision, it is very little chance of you
going wrong effectively, nobody is really going to question you, but
having said that is where I do believe there could be some sense of
complacency which could be set in and that gives an opportunity to
really look at that from a very different perspective.
ET Now: What do you make of the global mood? One is getting a sense that we are staring at a divided world and emerging market equities are underperforming developed market equities.
Prasun Gajri:
The story which has been for a while is a stronger US growth and weaker
Europe and probably a little bit better Japan and a weaker China. Now
that is something which seems to be driving the global economy at the
moment, and at the margin that is something which is going to drive the
global asset prices as well. Now the question remains how strong is
really the US economy? The indicators we have seen so far do point out
that it is coming out from the lows, but how strong does it really get?
We are still talking about 2 to 2.5% kind of growth!
The fiscal situation in the US is still nothing great and it remains to be seen if once the QE starts tapering off whether the economy really stays as strong as it is being made out to be or are there repercussions of higher interest rates
in the US and the economic growth in the US because we have clearly
seen the bond yields and the mortgage rates rise fairly substantial in
the US.
The emerging market will still give you between 5 and 7% kind of growth, the fiscal situation in emerging markets
is still better than most of the developed world and the opportunities
in the emerging markets could still possibly be better than a lot of the
developed markets. So while on a cyclical basis, short term basis what
you are saying is right, but structurally I do not think the emerging
market theme is broken. Yes, there is a slowdown in emerging markets,
but clearly if the US actually picks up, the emerging markets also
should do well and once that happens you could see the fund flows back
to the emerging markets and emerging markets again starting doing well.
So it is a fairly linked process. It is difficult to write off the
emerging markets so quickly and so soon.
ET Now: Let us look at the local fund flow situation whereas LIC has become a net buyer. What are local insurance firms doing, are you also putting money to work or redemption is still a problem?
Prasun Gajri:
The local insurance companies are not necessarily getting the flows at
the same pace as they were getting. I do not think their net redemptions
are at a very serious level, but I do not think the inflows are very
exciting either. LIC seems to have been a big buyer, but clearly LIC was
a big seller in the Jan to March quarter when most of us and other
private insurance companies were clearly buying. So they had a large
amount of accumulated cash which has been put to work now, but overall I
do not see too much of fund flows into the equity markets for the
domestic institutional investors at that moment.
ET
Now: When do you think will be the turning point where retail investors
will start pulling money out of fixed income products and they could
revisit equities?
Prasun Gajri:
Equity market has to do well for a while and sustain itself and get
some positive buzz around it for the retail investor to come. See a
larger amount of retail investors whosoever have entered in 2007-2008 is
a complete dissolution and nothing really to blame the investor because
the markets have been like that and therefore it is going to take a
little bit of time, markets have to sustain, real interest rates have to
become positive. Only then one will see the retail investors being keen
on the equity markets. So it could be a little bit longer than one
anticipates.
ET Now: Let us look at currency sensitives
now. The consensus call is that it is time to buy into pharma, IT, it
is time to buy companies which will benefit because of weak rupee. Do you see there is merit in this trade?
Prasun Gajri: Currency is a big beneficiary for sectors
like pharma and IT. For pharma it is a bigger positive. For IT it
remains to be seen while it is a positive, it clearly allows them a lot
of levy, but if you really look at it, the margins of IT companies have
actually shrunk over the last 12 to 18 months despite a very significant
rupee depreciation.
That tells me that while it is good for their business, a lot of those
benefits tend to be spent away either in terms of pricing, or further
expansion, or further spending, or further investments in the business
and it is not getting reflected in the margins. So while in the short
term it is positive, I would be a little bit wary of really putting that
into numbers over the longer term. IT companies also depend on how the
global macro plays out and how the growth in US really pans out and
therefore what is the demand situation for them that is to my mind a
much bigger factor and will influence some of these names much more.
ET
Now: What is the best way to approach consumers? Again the Street is
divided on what exactly it should do when it comes to consumer names?
Prasun Gajri:
It is very easy to say get out of consumers but I do not think people
would be very happy to get out of consumers because that is a trade
which has played over the last two-two and a half years without any
problem and it is a fairly easy trade. None of these companies are going
to lose you any significant amount of money to be honest. You may get a
5%-10% correction, but there could be a long time correction in these
names. So that would be a worry.
If I were to really look at
it, two or three things stand out. One is I would be more bullish on the
rural sector side of the consumption than urban consumption. So clearly
put more money to work on ideas which are more reliant on rural
consumption than urban consumption. That is one aspect. Look where the
earning growth is still reasonable. So, if the earning growth is still
reasonable, if the earning growth is going to be 8% to 10% or 10% to 12%
and the valuations are 35-40 times, this clearly does not make sense
but if the earning growth is still going to be between 15 and 20%, you
might as well play the valuations and stick onto it. So one has to
differentiate between the FMCG names, which has not really happened so
far.
