We see financials as one of most promising sectors: Krishna Sanghvi

Krishna Sanghvi, Head of Equities, Kotak AMC in an exclusive interview with Harsha Jethmalani of Myiris.com, spoke about performance of his funds, FII inflow, sectors likely to emerge as star performers, etc.

Krishna Sanghvi joined the Kotak group in May 1997 in the Auto Finance subsidiary, Kotak Mahindra Primus, handling credit risk management. Post this; he moved on to Kotak Mahindra Old Mutual Life Insurance as an advisor to the Life insurance subsidiary, managing the debt and equity portfolios. He joined Kotak Mahindra AMC in February 2006 and has been handling equity schemes for Kotak Mutual fund since January 2007. He has over 13 years of experience in the financial markets of which 11 years are at Kotak Mahindra group.

Could you throw some light on the structure of your research team? What according to you goes into good portfolio construction?

We have a buy side research team with 8 research analysts and they cover more than 200 companies stocks across the sectors and across the market capitalization. Each analyst is tracking a sector(s) and stocks there in.

Portfolio construction involves a reasonable mix of sectors and stocks so that it offers diversification to investors and not make them exposed to individual themes / sectors / stocks. Portfolio construction considers the a healthy mix of some aggressive and some defensive stocks so that it generates returns and tries to minimize the downside risks.

How frequently do you churn portfolio for Kotak 30 Fund? The fund is betting on Financials, Energy, and Technology sectors what is outlook for these sectors?

We seek to manage the fund based on our views and outlook on markets and stocks and as such do not have any churn criteria.

We see financials as one of the most promising sectors in terms of growth in credit and earnings. A healthy economy growing at 8% will really provide this industry with the credit growth prospects of 20% and we still have a sizable population that needs to be covered under formal banking channels. Energy is again a promising sector led by de-regulation process announced by government as well as the view that considering global economic outlook (mainly USA & Europe) of a muted growth the crude oil is also likely to remain range bound. Technology is also interesting considering the offshoring opportunities available in western world.

How would you rate the performance of Kotak Opportunities Fund as against its peers? What is the highest individual stock and sector exposure you can take in this fund?

The fund has been performing reasonably well in terms of its track record vis a vis peers as well as the benchmark. The individual stock exposures are capped currently at 5% of the portfolios while sector exposures are capped currently at 25% of fund. We do review the limits based on the sector / stock weights in the underlying benchmark.

What is the general consensus on equity markets? Are money managers still underweight on equities now?

No we do not think money managers are underweight on Indian equities. The equity markets are clearly cheering the growth outlook for the Indian economy. The investor appetite especially of global investors has turned positive on relative growth for India as Indian economy is set to double in next 5-6 years. While valuations may appear a bit premium in near term, we believe that earnings growth will come in to support the valuations.

Market gains this year have been driven mainly by expanding PE multiples for stocks. Are you concerned that the market is too expensive today?

The PE expansion was bound to happen as a reaction to the PE contraction that was seen around 15-18 months back. While markets are getting into above average valuations zone, it is still lower than historic highs recorded on valuation perspective. Also, we think that valuations must be looked into with a forward perspective and on visibility of earnings growth and that`s where a comfort is in place that in the short term valuations may appear a bit premium but we believe that earnings growth will come in to support the valuations. We think the investor`s worry on Indian markets is mainly on account of markets having risen quickly in a reasonably short time.

Foreign fund houses have invested over Rs 710 billion (USD 15.6 billion) so far this year and analysts believe that FII investment in stock markets will cross the last year`s record level. What is your take on this?

We believe that investment flows usually reflect the investor`s faith in sustainability of GDP growth and earnings growth on a relative basis. At the current juncture of global economy. Indian economy - having demonstrated its resilience in past 2 years - ranks among the fastest growing economies in world. This has led to a reasonable investor attention and money; both short term as well as long term. We think this is quite healthy for the Indian economy and markets.

Given that mid and small-cap stocks are more sensitive to interest rates do you anticipate any slowdown in earnings due to increase in interest rate?

We do not anticipate any major impact on profitability due to increase in interest rates at present. The business growth can take care of interest costs. The only risk can be from any major hike in commodity prices that may impact the working capital and interest costs thereon.

What macro factors are you keeping an eye on?

GDP / IIP Growth, Fiscal Deficit, Current account deficit, inflation, interest rates, currency movements.

Source: http://www.myiris.com/shares/company/ceo/showDetailInt.php?filer=20101006153736707&sec=fm

Don't raise allocations just yet

This current rally has been completely driven by FII buying. Most domestic institutions have been net sellers or have cautiously sat on the sidelines. As a result, there has been a peculiar effect on mutual-fund returns.

In September, while the Nifty rose 11.5 per cent, other broad market indices also registered similar strong positive performances. But, according to a study by Value Research, 275 funds out of an universe of 303 actively diversified equity funds underperformed respective benchmark indices.

This means retail investors using the active mutual-fund route were ‘badly’ served by fund managers. There were a couple of important reasons for this poor showing. One was abundant caution. Many funds are carrying high cash allocations because they think current valuations are too high for comfort.

Another reason for the underperformance is the unbalanced nature of the rally. Large caps (the top 200 stocks) have outperformed smaller caps. Most actively diversified funds hold significant exposures to mid-caps. As a result, they underperformed benchmark large-cap indices. This is the flip side of active fund investing. Anybody who is invested in an active mutual fund is banking on the fund manager’s discretion. If the manager’s gut feel or investing model suggests the market is too highly valued, he should exit. Similarly, if his instincts suggest carrying a substantial corpus in smaller stocks, he must do so.

When the fund manager is right, he beats the benchmarks. When he’s wrong, he underperforms. Between 2005 and 2008, smaller stocks did outrun large-caps and this happened in 2009, as well. Similarly, as and when the market does peak, fund managers with high cash allocations save capital.

Should you be investing heavily at the current levels? Valuations are very high by historical standards. The domestic institutional attitude is negative. FII money is the sole driver and experience tells us that FII attitudes can change suddenly for reasons unconnected with the Indian economics.

Most Indian retail investors have been very cautious through 2009 and 2010 because most of them were burnt badly in the last (2008-09) bear market. One reason for the bearish DII stance has been the lack of retail inflows. However, there is every chance that surging prices will tempt retail investors to re-enter at 32-month highs.

This is a classic error retail investors are prone to. Retail investors usually buy at peaks, sell at lows, and ignore the market in-between, which is when they should be steadily accumulating. It’s probably related to the fact that media coverage of equity is always at its noisiest at peaks and lows.

My personal opinion: If you haven’t entered earlier, this is not a great time to increase allocations to the stock market. If you are already invested or thinking of investing, set tight stop losses and adhere to them.

Source: http://www.business-standard.com/india/news/don%5Ct-raiseallocations-just-yet/410468/

Q&A: Mark Mobius, Templeton Emerging Markets Group

Emerging markets guru Mark Mobius believes the Indian market is no longer cheap but the country has been enjoying a premium over peers due to its growth prospects. In an interview with Mehul Shah, the executive chairman of Templeton Emerging Markets Group says India’s relatively strong fundamentals and accumulation of foreign exchange reserves put it in a much stronger position to weather external shocks. Edited excerpts:

The Indian stock market has received record inflows of $20.52 billion from foreign institutional investors (FIIs) this year. Do you think this is sustainable?
The combination of global liquidity, interest rate differentials and search for yields has led to higher allocations for emerging markets such as India. As a result, asset prices in emerging markets (especially Asia) are turning out to be clear beneficiaries of the quantitative easing in the developed world. As with any market run-up, investors should expect corrections along the way.

However, India remains a good medium to long-term investment destination. Also, the recent decision to raise FII investment limits in the domestic bond market should boost inflows (the government on September 23 increased the investment limit for FIIs in government securities and corporate bonds by $5 billion each, to $10 billion and $20 billion, respectively.)

What is your view on the high current account deficit in India? Is that a risk for the stock market?
India has traditionally been running a current account deficit due to a sharp rise in imports and because the economy is domestically driven, unlike other economies in Asia which depend more heavily on exports. However, strong capital flows (FII/FDI, as well as overseas borrowings by Indian companies) have helped maintain a positive balance of payments situation.

While the widening trade deficit is a concern, strong capital flows are expected to provide support. Increased domestic savings in a growing economy could also help. Looking ahead, the risks are a change in the global risk appetite and a sharp rise in energy prices, as either of these could exert further pressure on the current account.

Do you think valuations here look stretched compared with other emerging markets?
Though these are no longer as cheap, we believe the current ones are around the historical 10-year range and India has been enjoying a valuation premium due to its growth prospects. We continue to find opportunities. Our objective is to find good, solid companies that can survive even in a downturn.

India’s relatively strong fundamental characteristics and accumulation of foreign exchange reserves put it in a much stronger position to weather external shocks.

China and India are high-growth economies. Are there factors that make India’s stock market more attractive?
Both offer good long-term opportunities and pursue different economic and political models. While Chinese companies have more state control, Indian companies reflect the entrepreneurial spirit of the private sector, which has thrived despite the various challenges. India in particular stands to benefit from the demographic dividend and the expected rise in infrastructure spending. Overall, we are excited about both Indian and Chinese companies that are expected to benefit from the long-term structural drivers.

What are the key global risks that can spoil the party in emerging markets like India?
In today’s globalised economy, a downturn in one economy, such as the US, may not necessarily translate into a slowdown in other parts of the world. If we specifically look at the US, we expect a continued improvement in its economy. However, that will be gradual. We also must be careful to differentiate between what happens to the economy and what happens to the stock market. Stock markets tend to lead economic recovery. In a bull market that we are now experiencing, there will be corrections. We have to be ready for such short-term volatility.

Emerging markets have rallied over the past year and investors might be tempted to take profits, which could lead to short-term market corrections. That said, we expect these kinds of corrections in emerging markets and rather than focusing on when one might happen, we focus on buying and adding to investments that, in our view, have dropped to compelling valuations as a result. Overall, I am positive on the long-term outlook for emerging markets.

Volatility resides in all markets and bad times can be good times for investors. Which is why we always emphasise the importance of bottom-up research and looking at stocks on a company-by-company basis.

Source: http://www.business-standard.com/india/news/qa-mark-mobius-templeton-asset-management/410456/

Equity funds see record outflow

Equity funds witnessed their highest redemptions in a single month with September seeing an outflows from equity schemes of over Rs 7,000 crore. Redemptions were also seen in income, money market and ELSS schemes as mutual fund industry witnessed total redemption of Rs 71,800 crore in September, according to Association of Mutual Funds in India (Amfi) data.

Arindam Ghosh, CEO of Mirae Asset MF, said, “Surge in equity markets have led equity investors to book profits and invest in other asset classes.” Fund managers are sitting on cash waiting for the right opportunity to enter the market, he added. In September, Indian equity markets rose by over 11%.

This is the fourth straight month of redemption for equity schemes. Since the market regulator banned entry loads in August last year, equity schemes has seen net redemption of over Rs 21,400 crore. There has been net equity inflows only in the three months since August 2009. In September, outflows in income schemes stood at Rs 28,637 crore, money market schemes (Rs 36,100 crore), ELSS equity funds (Rs 270 crore), and balanced schemes (Rs 414 crore).

A senior official said, “Apart from booking profits, some investors are exiting schemes which are underperforming. With several gold ETF being launched, many investors are also looking to diversify their portfolio and investing in gold ETF.”

Source: http://www.financialexpress.com/news/equity-funds-see-record-outflow-of-over-rs-7-000-crore-in-sep/693649/