Rate sensitive sectors offer good opportunity over mid-term: Venugopal M

``Over the longer term, we are quite positive on the consumption space in India,`` says Venugopal M, Co-Head - Equities, Tata Mutual Fund.

In an exclusive interview with Varsha Inamdar, Venugopal Manghat further said, ``We feel that the ability to do substantial fiscal or monetary easing to tackle the current downturn is limited at this juncture. Also, crude oil prices continue to be stubbornly high. Thus, recovery will be more gradual this time. In such a scenario, one needs to follow a much more stock specific approach than a sectoral approach.  There could be significant divergence in performance of companies in the same sector. We are thus looking for companies with steady sales, earnings growth with good return ratios and low debt, which we feel, would continue to do well. We are also keeping a close watch on company specific valuations, as such a scenario can present good companies at very good valuations.``

What is your investment strategy at current levels? How have you churned your portfolio in the last three months? What is the strategy for the next couple of quarters?
Our funds are fairly well invested across sectors and have cash levels of 5-10%. We continue to be more positive on the consumer non-durable and pharmaceutical sectors. We are under weight on the banking sector while remaining neutral to the automobile sector. Within the banking sector, we are more positive on the private banking space.  We were of the view that the domestic economy is slowing down (impacting earnings growth) and risk aversion would prevail. Hence, we had positioned the portfolios accordingly and have not churned them much in the last three months. We are incrementally more positive on interest rate sensitive sectors and would look to add to such sectors in the next few months at appropriate price levels. The portfolios continue to be under weight on commodities and real estate. We believe the right approach in this market would be to keep investing in good quality companies at good valuations as they come and remain patiently invested.

What is your market outlook for 2012? By the end of 2012, do you see markets higher than current levels, lower or at similar levels?
Macro factors, both global and domestic are currently not supportive for equity markets. The sluggishness in the Indian economic growth is likely to continue for some time with GDP growth now forecasted at close to 7% even for FY13. This is a result of weak global scenario as well as lag effect of higher interest rates in the economy, which apart from lack of policy initiatives have led to much lower investment growth in the economy. Private consumption especially in urban areas is showing signs of moderation and the investment cycle is yet to show signs of recovery. Also, worsening global economic conditions could lower export growth prospects going forward. Given these conditions we believe the next few quarters could be challenging.

Earnings growth forecasts for Sensex companies have been lowered at the end of almost every quarter for several quarters now. We believe that this cycle would continue into the next calendar year and earnings growth could remain muted in FY12 and FY13. However, the positives are that the year 2012 is starting with low valuation levels and inflation is likely to cool off. Interest rates should therefore start coming down some time in the next calendar year which would be good. Given these factors, the market could be more positive in the second half while being range bound and volatile, reacting to overseas news flow as well as economic data in the first half. From current levels of the index, over a longer time horizon, one could expect reasonable returns.   

Debt funds have outperformed equity funds in 2011. Do you think debt funds will continue to outperform in 2012?
The central bank has already given its view on the direction that interest rates would take going forward. In a falling interest rate environment, debt funds especially the longer duration ones could gain significantly. A falling inflation and interest rate environment would also be positive for equity markets. However, the impact on earnings growth would be visible over a period of time. 

According to you, which sectors will likely to outperform or underperform in 2012? 

We feel that the ability to do substantial fiscal or monetary easing to tackle the current downturn is limited at this juncture. Also, crude oil prices continue to be stubbornly high. Thus, recovery will be more gradual this time. In such a scenario, one needs to follow a much more stock specific approach than a sectoral approach.  There could be significant divergence in performance of companies in the same sector. We are thus looking for companies with steady sales, earnings growth with good return ratios and low debt, which we feel, would continue to do well. We are also keeping a close watch on company specific valuations; as such, a scenario can present good companies at very good valuations. At current valuations, the interest rate sensitive sectors offer a good opportunity over the medium term. Over the longer term, we are quite positive on the consumption space in India.

What do you expect from Q3 earnings season?
The current quarter is also likely to be a muted quarter due to the impact of global uncertainty, high interest rates, depreciation of the rupee and slow down in the domestic economy. Seasonally, it is a weak period for some large sectors like Information Technology. Infrastructure and engineering sectors continue to be hit by lower order flows, lower margins and higher working capital cycle. The FMCG space is expected to continue its good volume growth trend while seeing lower margins. The banking sector could witness lower credit off take and pressure on margins while gaining in their investment book. Asset quality concerns would continue to play out. It could be a mixed trend for the automobile space with the two-wheeler sector doing better. The pharmaceuticals sector could show reasonably good performance in the quarter. 

What is your advice to investors in current market scenario?
Our message to investors is that India`s long term potential remains intact despite the current problems. This coupled with much more reasonable valuation means that over time, investment in equity could earn reasonable returns. We would therefore advise investors to use Systematic Transfer plans (STPs) to increase exposure to equity markets gradually, taking advantage of the current volatility while at the same time continuing to earn decent returns in debt funds in the short term.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20111229175544715&dir=2011/12/29