Sanjay Sinha, CEO, L&T Mutual Fund, which was known as DBS Chola Mutual Fund before it was acquired by L&T Finance in January 2010. Before joining DBS Cholamandalam Asset Management in September 2008, Mr. Sinha was the Chief Investment Officer at SBI Mutual Fund. He started his career with UTI AMC Pvt. Ltd. and was with them for over 16 years. He joined SBI Funds Management in 2005. Mr. Sinha is an Honours Graduate in Economics from University of Delhi and a Post Graduate from IIM Kolkatta.
L&T Mutual Fund is one of the premier mutual funds in the country that serves the investment needs of investors through a suite of acclaimed mutual fund schemes. With a well laid out investment management process and an equally proficient fund management team, L&T Mutual Fund helps its investors reach their financial goals. L&T Mutual Fund is present across 37 cities through its network of dedicated branches and is continuously increasing its footprints across the country. L&T Mutual is backed by one of the most trusted and valued brands, L&T Finance as the sponsor. L&T Finance and L&T Mutual Fund are part of the L&T Group, one of the largest and most respected groups.
In an exclusive interaction with Hemant P. Maradia and Fahima Shaikh of IIFL, Mr. Sinha says, "India stands out due to strong pace of GDP growth, which should be sustained over the next few years."
What is your reaction to the Goldman Sachs fraud case?
There is a point of view that the some of the activities of the big US banks are not transparent and beyond the jurisdiction of many regulatory authorities. These issues have been cropping up every now and again. What we right now have is mounting of an investigation by the SEC into alleged irregularities of Goldman Sachs in relation to a particular product. We don’t know what will be the conclusion of these findings. So, on that one would be a little guarded in responding. However, a couple of issues are still worrisome. One is the opacity with which some of the Wall Street banks operate. Another is the infallibility of the so-called big banks. It will be difficult to predict the enormity of the issue.
Some time back there were talks in the US on new set of regulations to be introduced for the financial firms. With the Goldman fraud case, the case for the new legislation will be strengthened further.
What is your outlook on interest rates?
We expect the RBI to go for calibrated hike in interest rates. Rate tightening cycle may be more front-ended. Most of the rate increases may get over in the first half.
Some of the pressure on the RBI to raise rates may subside in the second half. Inflation should start to moderate from the second quarter of FY11. If we have a reasonably good monsoon then food price inflation should also come down.
Also, there will be a need to get the capex cycle moving in a far more accelerated pace. A softer interest rate environment will be conducive for corporate investments.
How do you see benchmark yields?
The bond market seems to have received the borrowing programme positively; because it is staggered. Given the fact that there will be some more monetary tightening, there will be an upward pressure on benchmark 10-year yield. At the same time, the tightening cycles will not be too prolonged. In that case, the 10-year yield may not rise too much beyond 8.5-8.7%.
Indian shares recently touched 2-year highs? What in your view could be the challenges or concerns immediate or medium to long term?
In the near-term, the market will tend to react to every upward movement in interest rates. Historically, whenever there are rate hikes, the market has reacted negatively. A fairly large chunk of the market is in the interest rate sensitive sectors. Also, some of these rate sensitive sectors are fairly high beta in nature. So, whenever there is a rate hike, these sectors tend to take a hit, which in turn affects the overall market.
But I feel that if the stocks in these rate sensitive sectors do fall in reaction to RBI action, it will be a good long-term opportunity. Banks have largely benefited whenever the interest rate cycle has turned up. Loans will be re-priced faster and the deposits are anyways coming in for re-pricing. Therefore, their net interest margins would tend to expand. While there will be treasury losses they will be notional in nature.
Has the risk-reward ratio for equities narrowed? Where do you see opportunities now?
Corporate investments may start to pick up from now onwards. Out of the Rs20 trillion that was earmarked for spending on infrastructure in the 11th Five-Year Plan, only about Rs8 trillion has been spent so far. So, in the last two years of the Plan, there will be accelerated spending on infrastructure. In addition, there is a proposal to hike the infrastructure spending in the 12th Plan to US$1 trillion (Rs45 trillion). What this means is that the investments will have a major part to play in boosting India’s GDP going ahead.
There will be huge opportunities that will emerge from accelerated investments and the same will not be confined to sectors directly linked to infrastructure. This in turn makes the overall outlook for the market positive.
Another factor that influences the market is liquidity. With the global economy recovering funds will move from less risky asset classes to riskier asset classes. While there will be large allocations toward developed markets, there will also be proportional allocation to the emerging markets, where India will be hard to ignore. So, I expect the momentum in FII inflows to continue going forward also.
RBI’s role in maintaining the financial stability has been remarkable. This has happened because it has a fairly measured approach toward opening the various parts of the financial sector. It has now a good number of time-tested tools to formulate its monetary policy in response to the changing economic situation.
Do you feel the premium that Indian market commands vis-a-via other comparable emerging markets is justified?
India stands out due to strong pace of GDP growth, which should be sustained over the next few years. The capital market structure that is present in the country today also makes it attractive to overseas investors. So, there is a case for one to be overweight on India. The only reason for one to be a little apprehensive about India is on relative valuations vis-à-vis other emerging markets. But, valuation has to be seen with growth prospects and not in isolation.
What would be your advise to those who may have missed the rally and now want to enter the market? Is fresh buying advisable at this juncture or should one wait for a correction?
Markets are fairly valued at this juncture if you consider current earnings. But, from the third quarter of FY10, the earnings momentum has gathered pace. If earnings growth picks up further then the valuations may start appearing attractive.
If you commit a large chunk of your investment money toward equity, and for some reason there is short-term pain, then the initial reaction is one of disenchantment. Retail investors should come into the market in a staggered manner. Trying to time the market on the way up or down hasn’t worked for them in the past. One needs to be clear about the investment horizon and the risk appetite.
Do you fear any asset bubbles building in any part of the Indian economy e.g. real estate prices?
Two divergent trends are emerging in real estate. In commercial space, there is excess capacity and rates haven’t come down. So, the offtake is slow on the commercial side. The residential side is doing reasonably well. In the last quarter of 2009 when developers dropped the prices there was significant offtake. But now rates have started rising again. Despite that, there is demand for fairly priced residential properties. Wherever, the prices are moderate, the inventory is being reduced.
Are you satisfied with the Government’s policies?
This Government has decided to go for incremental reforms rather than blockbuster measures. So, the policy announcements are not creating too much of a sensation. But, the policies have been positive for sectors at which they are aimed at.
What is your reaction to FPOs not doing well?
It is good for the Government to offload shares in public enterprises to a larger pool of shareholders. A few significantly large PSUs are being brought to the market. The flip side is because the Centre is aiming to raise such a large amount of money through disinvestment in a short period of time, there may be pressure on the markets due to the liquidity that it will suck out from the system. Also, in few cases, the pricing has been aggressive, which has left retail investors disappointed. This will be another negative going forward.
How do you see the sovereign debt problems in certain parts of Europe?
There will be among the trouble spots in 2010 for the global markets. Issues connected with Greece have also not been resolved totally. The eurozone will be a cause for concern in 2010.
What about China?
They have executed some tightening for the real estate sector recently. There also seems to be some willingness to allow the yuan to appreciate much more rapidly. These two developments suggest the China is ready to move towards a market-driven economy. Rate tightening will slow the Chinese economy and yuan appreciation will make other nations more competitive. As long as the re-balancing in China is a gradual it won’t impact the world markets that much.
Which are the themes you are betting on for this year and the next fiscal?
Engineering and Capital Goods looks like an enduring theme. Pharma sector should also do well. What doesn’t look attractive in the short term actually is good in the long term. Therefore, Banking & Financials, Autos, etc. would be good to accumulate at lower levels.
We have a contrarian call on IT. If these companies have been able to sustain business in the downturn, they should be able to expand volume in the upturn. Right now, the stocks are reacting to Rupee appreciation. But, the Dollar could start rising in the latter half of the fiscal year, which will be good for IT companies.
What about telecom, fertilizer and FMCG?
Telecom we are not positive because of the competitive pressure and aggressive bidding for 3G spectrum. We are underweight on Telecom as of now. Deregulation in fertilizer is happening in calibrated manner. It is not getting deregulated completely. Some of the actual benefits for the sector will come a little back-ended. Most of the good news is already reflected in the stock prices. For some time, the sector may be a market performer.
FMCG is attractive but it is a fairly well-penetrated sector now. It is also prone to a lot of competitive pressure. But, the economic growth is more effectively getting passed onto the grass root levels. That will lead to greater purchasing power in the rural areas. How big an impact this will have on the sector would be visible in the quarter-on-quarter growth of FMCG companies. As of now, one is a little guarded about the sector.
What is your view on small-cap and mid-cap stocks?
The mid-cap segment may outperform the large-cap stocks in FY11. If the economy as a whole is doing well then it presents a whole host of opportunities to companies of small-and mid sizes.
Could you give your take on the SEBI-IRDA spat over ULIPs?
The move by SEBI is aimed at making a level playing field for all types of similar financial products. As of now the field is uneven with different guidelines for products with similar attributes. If the field is leveled then the ability of mutual fund industry to tackle competition from other similar products will increase. Mutual Funds are one of the most cost-effective investment products. It also has a fairly good track record in terms of returns delivered net of expenses.
How do you feel commodity prices will behave in the next few months?
If you look at the way commodity prices have moved in the past few months, they seem to have factored in a global economic recovery much ahead. But, there is still scope for commodity prices to rise from here onwards though they may not gain as rapidly as they have done in the past 12 months. If commodity prices do shoot up sharply it could derail the entire growth process.
There will be an aggregate demand for commodity as the global growth picks up pace. Also, two of the world’s most populated nations – India and China - are witnessing accelerated growth. Because of the scarcity of resources there will be an upward pressure on commodity prices. In the short term one will see volatility in commodity prices and stocks related to commodities.
Source: http://www.indiainfoline.com/Research/LeaderSpeak/Sanjay-Sinha-CEO-LandT-Mutual-Fund/10498950
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