In early March, there was a unipolar view that stocks would rally only after the elections. To us, that raised the risk of carrying high cash levels. We took a contrarian view that the markets could rally before the elections or maybe correct after it and deployed much of our cash. - SANJAY SINHA, CEO, DBS CHOLA MUTUAL FUND
Stock prices are reverting back to mean from a phase of extreme pessimism. But sectors which have bounced back in this rally may not be the ones which revive first, says Mr Sanjay Sinha, CEO of DBS Chola Mutual Fund, in an interview with Business Line. Mr Sinha also believes that with order flows from government projects likely to revive post-elections, this may not be the right time to hold a very defensive portfolio.
Excerpts from an interesting conversation:
There has been a view, based on economic data from the US, that the worst of this economic crisis is behind us. That is underpinning this stock market rally. What is your view on this?
There are three major pockets of economic activity in the world- the US is one and Europe and Japan are the other two. Data emerging from the US may be suggesting that it is now gearing up on a path of recovery. That cannot be said for UK and Japan as yet. Therefore, we cannot say with absolute confidence that the entire global economy is in a recovery mode. But the US does seem to be responding to stimulus measures and other steps taken by the government.
Is the current mood of optimism leading to the market ignoring negative news? The bad unemployment numbers from the US, for instance.
I believe the unemployment numbers would be a lag indicator of the economy rather than a lead indicator. Industries would first downsize in order to adjust to lower output; that is what reflects in unemployment data.
Once there is a productivity improvement, that reflects in better output and finally in the unemployment numbers. Going by that, there could even be further addition to the unemployment numbers. But an economic revival may well precede that.
The other part that you said, that the market is choosing to ignore data and is focusing on positive news alone; I do concede. But then, the markets tend to be more sensitive to the future than to the present or the past.
Therefore, if there is a sense of the macro economic conditions recovering, markets may begin to rally ahead of that. We have been in an extended period of pessimism. When one sees some vibrancy come into the market, then more optimism will come into the system. Factors such as the wealth effect leading to better spending and a better economy will follow.
But sometimes, these rallies are also false rallies. If you want to be absolutely certain of the outlook, then one would need to wait for the economic numbers to be consistently good for a period of time.
In India, the market has been buoyant though the earnings season is just round the corner. Do you think stock prices have discounted the worst case scenario on earnings?
If you see the way different sectors have corrected over the last year, prices do seem to have captured the differential impact (of the slowdown) on earnings of sectors. That is why some sectors such as real estate have corrected far more than others like, say — FMCGs.
But if you are talking of the recent rally, and asking if the stocks which have bounced back are going to see recovery ahead of others, that may not be the correct assessment. Investors are probably responding to just a low price, rather than to the sectoral outlook at this stage.
Is the market focusing too much on the near term? Cement and auto stocks have been marked up on the back of despatch and sales numbers over the last quarter.
I think cement and auto stocks had corrected significantly in anticipation that we will be in an extended downturn. But recent numbers seem to be negating that point of view. Stock prices are thus reverting back to their median levels.
If I have to extrapolate this to a broader market view, the overall market had given in to extreme pessimism, which was not warranted. India does have relative insulation from what is happening globally. That distinction needs to be made and is being made now. We do have elections coming up and that has put policy announcements on the back burner. That gives me optimism that policy imperatives will be pursued once the new government is in.
Regardless of what form that government will take, there are policy initiatives that will have to be taken. If you see the targets for the Twelfth Five Year Plan, we may now have to push through pending projects to keep to the timetable. You may see higher news flow after the elections on the order books of infrastructure and capital goods companies. That will have a cascading impact to connected sectors such as steel, cement and so on.
FIIs have been net buyers over the past month in Indian stocks. Is it correct to extrapolate this data and say risk appetite has revived?
Risk appetite has been restored globally, to some extent. Funds are flowing into the emerging markets and into India too. But to multiply a fortnight’s numbers and say that FII flows will be strong for year will not be realistic. The IMF and World Bank have both come out with the outlook that global GDP will be in positive territory for 2010, compared to 2009. If that is correct, the optimism will have to build up in the second half of 2009 itself. That could lead to better FII flows. India does continue to stand out as a great destination based on its macro outlook. I would not be surprised if 2008-09 ends with a positive FII flow as compared to 2008.
What stance have domestic institutions taken amid this rally?
The mutual fund (inflow) numbers have turned positive since the second half of March. There was also a fair amount of cash with mutual funds which is now getting deployed into stocks.
As far as insurance companies are concerned, there are two sets of strategies. The private sector insurance companies usually see a seasonal bunching up of inflows in the January-March quarter. That has largely been deployed in recent weeks.
On the other hand, public sector insurance companies have already deployed their funds and are playing a contrarian role in the markets, by being sellers. That’s why the ‘domestic institution’ action which you see in aggregate numbers show such fluctuation.
Many equity funds have not matched the benchmarks in this rally; but some of DBS Chola’s funds have. Why is this?
In the early part of March we saw that there was an unipolar view in the markets that stocks would rally only after the elections. To us, that raised the risk of carrying high cash levels. Therefore, we took a contrarian view that the markets could rally before the elections or maybe correct after it. Now, both these legs may play out.
The markets may rally in the run up to the elections on the back of global cues. We may come to a threshold level by the time election results are out. If the fear of an unstable coalition government at the Centre is not well-founded, then the markets may well gain momentum.
Basically, we took the call that timing the market to perfection may not be possible. Therefore, we almost completely deployed cash levels in our large cap funds. That paid off, because in the last rally, our funds have moved into the top quartile.
Are you sticking to a defensive position on your portfolios? What are your key sector bets now?
We had not created a very defensive position in our portfolio and therefore suffered in the meltdown. But the view we have to take now has to be prospective and not retrospective.
I believe that stocks or sectors that were battered for low order flows and so on would come back in a more stable scenario. We have created a portfolio around that. In alphabetical order, that would be auto, cement, construction, oil and gas and pharmaceuticals.
Excerpts from an interesting conversation:
There has been a view, based on economic data from the US, that the worst of this economic crisis is behind us. That is underpinning this stock market rally. What is your view on this?
There are three major pockets of economic activity in the world- the US is one and Europe and Japan are the other two. Data emerging from the US may be suggesting that it is now gearing up on a path of recovery. That cannot be said for UK and Japan as yet. Therefore, we cannot say with absolute confidence that the entire global economy is in a recovery mode. But the US does seem to be responding to stimulus measures and other steps taken by the government.
Is the current mood of optimism leading to the market ignoring negative news? The bad unemployment numbers from the US, for instance.
I believe the unemployment numbers would be a lag indicator of the economy rather than a lead indicator. Industries would first downsize in order to adjust to lower output; that is what reflects in unemployment data.
Once there is a productivity improvement, that reflects in better output and finally in the unemployment numbers. Going by that, there could even be further addition to the unemployment numbers. But an economic revival may well precede that.
The other part that you said, that the market is choosing to ignore data and is focusing on positive news alone; I do concede. But then, the markets tend to be more sensitive to the future than to the present or the past.
Therefore, if there is a sense of the macro economic conditions recovering, markets may begin to rally ahead of that. We have been in an extended period of pessimism. When one sees some vibrancy come into the market, then more optimism will come into the system. Factors such as the wealth effect leading to better spending and a better economy will follow.
But sometimes, these rallies are also false rallies. If you want to be absolutely certain of the outlook, then one would need to wait for the economic numbers to be consistently good for a period of time.
In India, the market has been buoyant though the earnings season is just round the corner. Do you think stock prices have discounted the worst case scenario on earnings?
If you see the way different sectors have corrected over the last year, prices do seem to have captured the differential impact (of the slowdown) on earnings of sectors. That is why some sectors such as real estate have corrected far more than others like, say — FMCGs.
But if you are talking of the recent rally, and asking if the stocks which have bounced back are going to see recovery ahead of others, that may not be the correct assessment. Investors are probably responding to just a low price, rather than to the sectoral outlook at this stage.
Is the market focusing too much on the near term? Cement and auto stocks have been marked up on the back of despatch and sales numbers over the last quarter.
I think cement and auto stocks had corrected significantly in anticipation that we will be in an extended downturn. But recent numbers seem to be negating that point of view. Stock prices are thus reverting back to their median levels.
If I have to extrapolate this to a broader market view, the overall market had given in to extreme pessimism, which was not warranted. India does have relative insulation from what is happening globally. That distinction needs to be made and is being made now. We do have elections coming up and that has put policy announcements on the back burner. That gives me optimism that policy imperatives will be pursued once the new government is in.
Regardless of what form that government will take, there are policy initiatives that will have to be taken. If you see the targets for the Twelfth Five Year Plan, we may now have to push through pending projects to keep to the timetable. You may see higher news flow after the elections on the order books of infrastructure and capital goods companies. That will have a cascading impact to connected sectors such as steel, cement and so on.
FIIs have been net buyers over the past month in Indian stocks. Is it correct to extrapolate this data and say risk appetite has revived?
Risk appetite has been restored globally, to some extent. Funds are flowing into the emerging markets and into India too. But to multiply a fortnight’s numbers and say that FII flows will be strong for year will not be realistic. The IMF and World Bank have both come out with the outlook that global GDP will be in positive territory for 2010, compared to 2009. If that is correct, the optimism will have to build up in the second half of 2009 itself. That could lead to better FII flows. India does continue to stand out as a great destination based on its macro outlook. I would not be surprised if 2008-09 ends with a positive FII flow as compared to 2008.
What stance have domestic institutions taken amid this rally?
The mutual fund (inflow) numbers have turned positive since the second half of March. There was also a fair amount of cash with mutual funds which is now getting deployed into stocks.
As far as insurance companies are concerned, there are two sets of strategies. The private sector insurance companies usually see a seasonal bunching up of inflows in the January-March quarter. That has largely been deployed in recent weeks.
On the other hand, public sector insurance companies have already deployed their funds and are playing a contrarian role in the markets, by being sellers. That’s why the ‘domestic institution’ action which you see in aggregate numbers show such fluctuation.
Many equity funds have not matched the benchmarks in this rally; but some of DBS Chola’s funds have. Why is this?
In the early part of March we saw that there was an unipolar view in the markets that stocks would rally only after the elections. To us, that raised the risk of carrying high cash levels. Therefore, we took a contrarian view that the markets could rally before the elections or maybe correct after it. Now, both these legs may play out.
The markets may rally in the run up to the elections on the back of global cues. We may come to a threshold level by the time election results are out. If the fear of an unstable coalition government at the Centre is not well-founded, then the markets may well gain momentum.
Basically, we took the call that timing the market to perfection may not be possible. Therefore, we almost completely deployed cash levels in our large cap funds. That paid off, because in the last rally, our funds have moved into the top quartile.
Are you sticking to a defensive position on your portfolios? What are your key sector bets now?
We had not created a very defensive position in our portfolio and therefore suffered in the meltdown. But the view we have to take now has to be prospective and not retrospective.
I believe that stocks or sectors that were battered for low order flows and so on would come back in a more stable scenario. We have created a portfolio around that. In alphabetical order, that would be auto, cement, construction, oil and gas and pharmaceuticals.
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