The unwinding of leveraged positions in Indian equities by foreign institutions, in the wake of the crisis in the US financial sector, is likely to persist over the next couple of months, said UTI Mutual Fund’s senior fund manager, Sanjay Dongre. In an interview with ET, he discusses about the outlook for Indian equities, which, according to him, has to consolidate before the next rally.
What are the implications of the turmoil in the US financial sector on foreign fund flows and economy?
The implications are clearly negative. In the past 3-5 years, FIIs have invested in a large chunk of money in our country and some of them happen to be these financial institutions and investment banks. A lot of liquidity that flowed into equity markets in recent years was leveraged money. If these institutions are going through a painful period, they will look at garnering liquidity from the rest of the world.
Accordingly, a lot of deleveraging will happen, which will result in global liquidity shrinking. In this situation, you cannot expect them to invest money in our economy. On the contrary, they are likely to take out more money from our markets and that is what we have been witnessing in the past 3-4 months. And I see this trend continuing for the next couple of months. To that extent, it will have an impact on the economy and stock markets.
So, can we assume that the market is still some distance away from the bottom? Do you have any levels in mind?
I think there would be still some consolidation left in the market because the pain the global financial institutions are going through...so we cannot expect much of inflows from them in the near-term. Also, it is too early to talk about the business plans of these financial institutions, especially when there are a lot of mergers, bankruptcies, and liquidations taking place.
For instance, when somebody takes over a troubled investment bank, which has a lot of investments in India, it can happen that the acquirer does not like these businesses and can just ask the target company to liquidate everything and get out of the market. These uncertainties exist, so the market has to consolidate for some more time before saying firmly that a bottom has been formed.
It is usually said that retail investors are the last to enter a bull market and last to exit a bear market. So, would you agree that, when retail investors exit the market in a big way, we would have reached the bottom?
All the investment gurus have said that bull markets are born out of despair or panic and they die out in a euphoric situation. Retail investors try to move along with the sentiment in the market. So, when there is despair in the market, though it may be the start of a bull market, the retail investor tends to get out as the sentiment is bad. That is where they go wrong. So, I would partly agree on this point, but it needs to be noted that this time, despite the worsening sentiment, retail investors have not exited the market in a big way.
What is your outlook on corporate earnings growth? What are your major concerns over the quality of earnings growth over the next 3-4 quarters?
Though Indian companies might have sales growth of around 20% this year, which is lower than the previous years, earnings growth are likely to be only in the high single digits. This is because Indian companies have been facing margin pressure because of higher raw material and interest costs. Since commodity prices are easing, there might be some relief on raw material prices. But, one aspect, which concerns me more at least in the short-term, is the exposure of corporates to derivatives. The turmoil in the US will have a lot of negative impact on these derivative exposures and will affect the companies’ other income.
What investment strategy would you recommend for retail investors? What are the sectors you would recommend as of now?
Retail investors should not invest in sector funds... they should focus on thematic or, even better, diversified funds. If there was one sector, which would take the lead when the market rallies, my guess would be the banking and financial sector. I am taking this view, not because these shares have been beaten down the most in the recent months, but that once inflation and interest rates ease by next year, this sector will stand to benefit the most.
What are the implications of the turmoil in the US financial sector on foreign fund flows and economy?
The implications are clearly negative. In the past 3-5 years, FIIs have invested in a large chunk of money in our country and some of them happen to be these financial institutions and investment banks. A lot of liquidity that flowed into equity markets in recent years was leveraged money. If these institutions are going through a painful period, they will look at garnering liquidity from the rest of the world.
Accordingly, a lot of deleveraging will happen, which will result in global liquidity shrinking. In this situation, you cannot expect them to invest money in our economy. On the contrary, they are likely to take out more money from our markets and that is what we have been witnessing in the past 3-4 months. And I see this trend continuing for the next couple of months. To that extent, it will have an impact on the economy and stock markets.
So, can we assume that the market is still some distance away from the bottom? Do you have any levels in mind?
I think there would be still some consolidation left in the market because the pain the global financial institutions are going through...so we cannot expect much of inflows from them in the near-term. Also, it is too early to talk about the business plans of these financial institutions, especially when there are a lot of mergers, bankruptcies, and liquidations taking place.
For instance, when somebody takes over a troubled investment bank, which has a lot of investments in India, it can happen that the acquirer does not like these businesses and can just ask the target company to liquidate everything and get out of the market. These uncertainties exist, so the market has to consolidate for some more time before saying firmly that a bottom has been formed.
It is usually said that retail investors are the last to enter a bull market and last to exit a bear market. So, would you agree that, when retail investors exit the market in a big way, we would have reached the bottom?
All the investment gurus have said that bull markets are born out of despair or panic and they die out in a euphoric situation. Retail investors try to move along with the sentiment in the market. So, when there is despair in the market, though it may be the start of a bull market, the retail investor tends to get out as the sentiment is bad. That is where they go wrong. So, I would partly agree on this point, but it needs to be noted that this time, despite the worsening sentiment, retail investors have not exited the market in a big way.
What is your outlook on corporate earnings growth? What are your major concerns over the quality of earnings growth over the next 3-4 quarters?
Though Indian companies might have sales growth of around 20% this year, which is lower than the previous years, earnings growth are likely to be only in the high single digits. This is because Indian companies have been facing margin pressure because of higher raw material and interest costs. Since commodity prices are easing, there might be some relief on raw material prices. But, one aspect, which concerns me more at least in the short-term, is the exposure of corporates to derivatives. The turmoil in the US will have a lot of negative impact on these derivative exposures and will affect the companies’ other income.
What investment strategy would you recommend for retail investors? What are the sectors you would recommend as of now?
Retail investors should not invest in sector funds... they should focus on thematic or, even better, diversified funds. If there was one sector, which would take the lead when the market rallies, my guess would be the banking and financial sector. I am taking this view, not because these shares have been beaten down the most in the recent months, but that once inflation and interest rates ease by next year, this sector will stand to benefit the most.
Source:http://economictimes.indiatimes.com/Interview Sanjay_Dongre_Senior_fund_manager_UTI_Mutual_Fund/articleshow/3515639.cms
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