Mr. N. Sethuram, Chief Investment Officer, Shinsei Investments

Shinsei Investments, a new player in Mutual fund industry plans to launch its first two mutual fund products in the country before end-July. Japan's Shinsei Bank holds a 75 % stake in the mutual fund house, with investor Rakesh Jhunjhunwala and Freedom Financial, 15 % and 10 % respectively.

Mr. N. Sethuram, Chief Investment Officer, Shinsei Investments, prior to his current assignment, he was CIO with SBI Funds Management Pvt. Ltd. He started his career in State Bank of India 1976 and has over 31 years of banking experience in diverse fields like Credit, Forex and Investments. Of his diverse assignments with SBI, he was also posted as Senior Vice President (Credit and Investments) at the Bank's Tokyo Branch.
Speaking with Anil Mascarenhas and Fahima Shaikh of India Infoline, N. Sethuram says, “When market surges, logic is lost and these surges are not supported by fundamentals and valuations tend to get distorted”

What are your expectations from the Union Budget?

We are not expecting any big-bang announcements in the budget that would impact the equity markets. The budget would have to look at avenues for raising revenues. It would also be too early to expect any drastic reforms measures from the upcoming budget.
On the disinvestment front, we don’t expect large scale disinvestments to be announced. The government may opt for some small size divestments initially before looking at some big ticket ones in the next couple of years. Overall, we feel that the government would need to focus more on reining in the fiscal deficit, which is very vital.

Which are the sectors likely to benefit from the budget?

The government is very clear about the role infrastructure will play in order to give a thrust to the economy. Companies related to this sector will obviously be the beneficiaries. Having said that, I believe one need to very specific at picking up stocks as the prices have run up significantly and so have valuations.
The market has surged post the election verdict. Hardly anyone could participate in the first 2000 points rise in the Sensex after the elections results were announced. Typically, when such surges happen, logic is lost. These upswings are not supported by fundamentals and valuations. Valuation re-rating has taken place in a major way. Whether markets can sustain these levels and whether current valuations are justified would be the question in the minds of most investors. The current valuations are to be viewed in the backdrop of poor earnings growth by the corporates last year. Even in the current year, the earnings growth is expected to be subdued. To that extend current market valuation don’t seem to be justified. However, we expect earnings growth to rebound in the next year, with expectations of return to high GDP growth pattern of over 8%. If the current market levels are valued discounting the earnings expectations of the next year, the market valuations would look reasonably attractive.
These are times when most people are keen on investing in the equity markets and to an extent feel that they have missed out on the opportunity to invest at lower levels. While selective buying is taking place, we are also seeing profit booking happening as the markets have run up significantly by almost 80%-90% from its lows. One can expect to see some cooling in the equity markets by around 10-15/% from the recent highs.
We are very positive on the prospects of the equity markets over the medium to long term. Our optimism stems from the fact that the Indian economy would regain 8% plus GDP growth as soon as the conditions in the US starts improving and this growth can be sustained over a long period. One can certainly hope to get good returns on equity investments over the next three to five years.

What is your view on Real Estate as a sector?

We have seen some improvement in the fortunes of the real estate sector. There would be selective opportunities to invest in this sector. This is a market where we have to be stock-specific rather than sector specific.

You mentioned about the launch of Shinsei Industry Leaders Fund. Generally, the leaders in the industry would already have had a good run. How would you be able to outperform by buying these companies?

We are looking to launch the Shinsei Industry Leaders Fund shortly, which would be a diversified equity fund. In our definition of ‘leaders’, apart from companies which have the largest market share in the respective sectors, we have also included companies which have achieved the highest growth in sales as also the companies with the highest profitability. The selection of the companies which are leaders in their respective sectors would be based on their performance in their core business over the last three to five years. There are 43 sectors as classified by AMFI and we would identify 3 to 5 companies as leaders in each sector. We would typically have a universe of around 120 companies to select from. Our portfolio would have around 25 – 35 stocks.
Most mutual fund houses follow a top down policy for selecting sectors to invest in and then a bottom up approach for individual stock selection. In our proposed Shinsei Industry Leaders Fund, we would first identify the leaders among various sectors. Once we identify the leaders we would do a bottom up stock picking from among the leaders in the sectors that we feel would perform well.
Typically, it is the mid-cap companies which have the highest growth rates in sales and profits in their respective sectors, while it is the large market cap companies which tend to have the largest market share. Our portfolio would therefore be a blended portfolio of large and mid-cap companies. We have observed that in most market conditions, it would be the leaders that outperform. An investor in our fund can hope to get a portfolio comprising of leading companies giving good market relative returns.
The Japanese are symbolized by their quality discipline and precision. Considering the fact that we are the first mutual fund in India sponsored by a Japanese financial services group, we would endeavor to imbibe these qualities in our funds.

The debt market has recently seen increased volatility. What is your view on the 10-year-bond?

The proposal in the interim budget has thrown up a large deficit and has put a lot of pressure on the government’s borrowing calendar. We don’t know how much more would be added to the same in the coming regular budget. The supply of papers on account of the large government borrowing has placed an upward pressure on the interest yields in gilts. This is going to be a negative factor until the government is able to address the budget deficit issue. It is our house view that the benchmark 10-yr-bond would move between 6.5% - 7.25% in the short to medium term.
Last year, we witnessed a rally in the debt market when the yield on the 10 year gilts moved from around 9.5% to 4.90%. However, since then the yields have tended to move upwards and are currently at around 6.9%.

So do you see any further rate cuts?

There is a small possibility of one further rate cut announcement by RBI. However, we feel that this can at best be to the extent of 0.25%.

India has grown by 5.8% in the third and fourth quarters of the last fiscal year, which I believe is an excellent growth rate considering the fact that most parts of the developed world were in the grip of a severe recession. We believe that once the recessionary phase is over in the rest of the world, we can regain growth rates of over 8%. While the stimulus announced by the government have been aimed at kick starting the slowing economy, we think that the priority should now shift to tackling the large fiscal deficit. Problems exist in many sectors, especially export-oriented sectors like diamond and textiles. But I believe providing stimulus packages to these export oriented sectors would not benefit these sectors much unless the global economy recovers.
From October 2009, with the base effect wearing out, we are likely to witness higher inflation numbers. We are particularly worried about the period from January to April next year, when the inflation could see a steep rise because of the low base effect of the earlier year. If the inflation climbs to uncomfortable levels then, the RBI may then be forced to reverse their current stance of maintaining high liquidity and low interest rates.

Does the decoupling theory remain just a theory?

I don’t think India would be completely decoupled from the world anymore. Having said that, India has the potential to grow at a much faster pace than the developed world over the next few decades. We have already seen last year India grew by 6.7%, when the US and Euro Zone were at zero or negative growth. So to an extent we were decoupled from the developed countries, but moved in the same direction. As we get increasingly integrated into the global economic system, we would tend to move in the same trend as the global economy. India’s growth story is also based on domestic core sector development and consumption and we believe that these two factors along with our favourable demographic profile would drive growth over the next few decades. India can sustain higher growth rate than the rest of the world.

What impact do you see with the oil prices fluctuating?

We all know oil prices have been going up steadily and reaching uncomfortable levels, especially for India, as it increases our import bill. This in turn adds up to our trade and Current Account deficits. Oil marketing companies have again reached a stage where they would incur losses unless fuel product prices are revised. India would be happy at a price of crude being below $50 per barrel.

What is your advice to equity investors?

Investors have been complaining about missing the recent rally as many expected the Sensex to correct post the election as they were expecting a hung parliament. Most investors would have planned to make an entry once there was clarity on the government formation at the Center. The market charted its own course to touch 14,000 immediately after the election results were announced and moved up further thereafter.
We are very optimistic about India’s future. Investors, who want to invest in equity, need to have a longer term view. If we believe India can sustain high growth rates over the medium to long term, then investing into equity and equity mutual funds can certainly give good returns over a three to five year horizon. Investors could look at making at entry at current levels and invest in a phased manner. Markets have a tendency to run up significantly once the economy recovers and the momentum sets in.

Being a new player, what is your approach to the market?

Apart from the Shinsei Industry Leaders Fund, which will be our first equity fund, our first debt fund launch would be the Shinsei PSU Bond Fund, which would predominantly invest in high quality papers of public sector entities. The fund would also be rated with the highest credit quality rating by a leading rating agency.
Initially, we are establishing our offices in the major metros and will have a presence in six centers viz. Bangalore, Ahmedabad, Mumbai, Delhi, Kolkota and Chennai. At a later stage, we would look at expanding our presence in other centers.

Source: http://www.indiainfoline.com/news/showleader.asp?storyId=780&lmn=1