‘It is a stock-picker's market'

Wherever we see corporates with profitability and visibility of growth in top-line, and management moving in the right direction, those are the companies we are bullish on. These stocks may fall in any sector, so we are less sector-specific.

It appears that the hard lessons learnt in the past two years have not only instilled caution in retail investors but also made fund managers more choosy in selecting sectors and stocks. In an interaction with Business Line, Mr Navneet Munot, Chief Investment Officer, SBI Mutual Fund, shared his views on the market, the growth potential for the industry and his recently launched PSU fund.

Excerpts from the interview:

The market corrected 10 per cent from its recent peak. Do you expect further correction?

The recent volatility is driven by global concerns — the concern over the alarming debt, and the contagion emanating from the peripherals of Europe. So there could be some more volatility arising from global factors. Barring that, I don't see any wrong with the domestic economy. We are positive about the domestic economy and the growth momentum is very strong. I would tend to believe that the downside is pretty limited, considering the domestic potential. Even if the market corrects by 5-10 per cent, it will still be quite attractive.

Going by your April portfolio, it appears that you are fully invested. In the event of a further market correction will you lose the short-term opportunity?

There is some amount of cash in the portfolio but our belief for several months now is that market will be in a narrow range and our focus has to be on stock-picking. Our investments are done on the basis of a long-term strategy and are rightly positioned. We don't take large cash calls. But in portfolio composition we are under-weight in some of the more globally sensitive sectors stocks such as metals, and are more focused on domestic themes.

What are your sector views at this juncture?

Our view is that it would be more of a stock-picker's market; that is why we are not bullish or bearish on sectors. Within sectors, wherever we see companies with profitability and visibility of growth in top-line, and we find the management doing well and moving in the right direction, those are the companies we are bullish on.

These stocks may fall in any sector, so we are less sector-specific and more a bottom-up stock picker. Some of the themes we prefer are domestic consumption; we also feel there will some pace of execution in infrastructure sectors such as power and roads and buildings. We are also bulish on a few other sectors, such as healthcare, for instance;we believe there is opportunity in generic and also domestic formulation markets. We are bearish on metals and financials.

With the latest 3G auction, what is your outlook for the telecom sector? Is there any opportunity for equity investors over the next couple of years in this sector?

Unfortunately there has been a slew of negative news in this industry for the past several months. The competition in the industry has intensified. At some point in time there may be consolidation in the industry. I am not sure what the tipping point is; some of the larger players may survive, and they will also thrive. So, in our Contra Fund, we are over-weight on telecom stocks as a contrarian play, but we are underweight in most of our other funds.

The sector top-line may be 15 per cent but predicting the bottom will be tricky. As the enterprise values of some stocks are entering the comfort zone this sector is currently a contrarian call.

Tell us about your new fund offer with a PSU theme…

PSUs have the necessary scale and the size, which is critical at this stage of the country's economic growth. The resilience shown by the public sector during difficult times, better corporate governance standards, and their size and the scale is crucial.

The productivity and efficiency shown by PSUs during the last several years and their ability to stand up to competition has improved. Divestment will be a big catalyst for unlocking value and they are going to be value generators.

In the last three years PSUs outperformed the market. Over a ten-year period they have outperformed the BSE Sensex. So we believe that they are rightly positioned to take advantage of the opportunity in the economy.

Also, from a risk-return perspective, when the domestic front is looking good, even as there may be some uncertainty on the global front, a PSU fund fits nicely into any equity portfolio.

Do you anticipate any moderation in inflation and what is your take on interest rate movement in the near future?

We see a global fall in commodity prices. This is a positive for countries such as India. We are large importers of commodities such as metal and crude. If the monsoon is good, food inflation will also fall. A softening in global commodities and decline in food prices can bring inflation down to 5 per cent at the end of the year.

On the interest rate front, policy rates are going to increase by 75 to 100 basis points over the next 12 months.

To some extent it's already priced in to bond markets. We continue to expect the short-term rates to remain tight after the outflows on account of 3G licences and the pick-up in credit rate growth. So excess liquidity will dry up and put pressure on short-term rates.

Long-term bond yields have softened quite a bit in the last few weeks on bunching up of positive factors on account of more than expected auction rates on 3G; global risk aversions also helped to bring down the long-term rates.

Source: http://www.thehindubusinessline.com/iw/2010/06/06/stories/2010060650430800.htm