We Are Bullish On Information Technology, Healthcare & Financials Sector

Anup Maheshwari, Executive Vice President & Head - Equities, DSP BlackRock Mutual Fund

Growth risks are rising and the currency is continuing to remain weak, there has been some respite as primary inflation moderated and global commodity prices corrected somewhat. This should help moderate the core inflation going forward and have a positive effect on India's economy. We at Capital Market interacted with Mr. Anup Maheshwari, Executive Vice President & Head - Equities of DSP BlackRock Mutual Fund, to know the factors which would lead the Indian equity markets in Calendar Year (CY) 2011.

Here are the excerpts:

In Calendar Year (CY) 2011, growth across the world slowed down. Will CY 2012 be better or growth will slow down further? More specifically will India growth fall to 6-6.5% with policy paralysis and foreign capital flight continuing?

Given that the second quarter GDP number was sub 7%, we believe that India is currently experiencing a slowdown in growth. India is slowing due to the tightening of monetary policy to bring inflation under control. Further, the slowdown is driven by a dip in investments largely due to a more uncertain global backdrop. Therefore, looking ahead, growth is expected to remain muted as export growth also eases in response to slower external demand.

While growth risks are rising and the currency is continuing to remain weak, there has been some respite as primary inflation moderated and global commodity prices corrected somewhat. This should help moderate the core inflation going forward and have a positive effect on India's economy. Furthermore, unless there is a concerted effort to find a solution to the current crisis in the Euro-zone, the global markets will remain volatile and continue to negatively impact market sentiment and growth.

Industrial capex seems to be showing mixed signs across various industries, what's your view on this theme's market performance in CY 2012? Which are the sectors appearing attractive to the fund managers going forward in CY12?

At this time, we do not envisage any major revival in industrial capex in CY 2012. In fact, industrial capex has been relatively slow since 2008 and continues to hinder the growth of the overall economy. In addition, policy reforms continue to remain sluggish and therefore challenges with regards to land acquisition, mining, and infrastructure continue to persist.

Going forward, we do believe that interest rate sensitive sectors will appear attractive as the RBI has indicated that there will be a pause in interest rate hikes. Therefore barring any major systemic shocks, we may consider adding selectively to these sectors.

With Euro debt issues pressurizing global banks and NPAs piling up on Indian PSU banks, how will the finance sector perform in the Indian markets in CY 2012?

We believe that much of the negative news regarding the financial sector has been priced into the Indian PSU banking stocks. Besides, they are currently trading below their historical values. Furthermore, the challenges currently facing the Euro-zone have little bearing on Indian PSU banks and NPAs as Indian PSU banks do not have much exposure to the Euro-zone's sovereign debt. Furthermore, in our view the difficulties facing PSU banks relate more to the credit quality concerns which are driven by a slowdown in the economic cycle and a higher interest rate scenario. Therefore, banks which have a higher exposure to infrastructure (power in particular), agriculture and SMEs could face some headwinds going forward.

Midcaps/smallcaps have been crushed very hard in CY 2011. What is your view on their market performance in CY 2012? Which are the sectors within this space that investors should invest or accumulate? What is your outlook?

In our view mid/small cap companies can do well in CY2012 if they have strong business models and cash flows as well as low leverage. However, our preference is towards large cap stocks as they have historically maintained strong cash flows, high-quality management teams, and stable balance sheets. Furthermore, in light of high interest rates, companies with limited leverage will have the capacity to generate higher returns and may be more attractive investments.

What Sensex/NIFTY level do you foresee at the end of CY 2012 and which stocks/sectors/themes will be the major drivers for the rise/fall vis-à-vis end-CY 2011?

For FY 2013, we expect earnings growth to be near 13-15% despite the current and near-term volatility in the Sensex/Nifty. We are bullish on Information Technology, Healthcare and Financials sectors.

How can investors choose between different avenues in the equity category? Also what are the returns that can be expected from them going forward in CY12?

During volatile market conditions, a portfolio comprised of large cap companies could be a more attractive investment for investors. Due to the fact that the companies in this universe have achieved scale, have good management resources, and generally are leaders in their industry categories, they are better able to sustain growth during volatile times. As such, the performance of large cap companies may potentially provide for a 15% CAGR over the long term although these returns may not be linear.

In India, consumption theme has outperformed all other themes over the past couple of years. Will the trend continue in CY 2012? Can India's outsourcing theme outperform other themes in CY 2012?

Yes, consumption will continue to be a positive driving factor to GDP growth in India in CY 2012. Although we have seen some slowdown in the sales of high value goods, rural demand continues to remain strong. 

Although the outsourcing theme will continue to be one of the drivers for India's growth, we perceive a large opportunity in the pharmaceutical sector (through CRAMS). Within the next two to three years, many revenue generating drugs are losing their patent licenses in the US, giving Indian pharmaceutical companies the opportunity to make generics and enter the market.  We also believe that automobile/auto-ancillary business will also drive growth along with the Information Technology sector.

Infrastructure remains a major laggard. With policy/execution/reform paralysis in government and high interest rates, what is your view on this segment's market performance in CY 2012?

The infrastructure segment will remain under pressure in CY 2012 as there have been no major projects announced within that space. Furthermore, we do not expect any new developments or announcements in the near-term in this sector given the high interest rates and the demand slowdown due to a weak global economic environment. However, beyond CY 2012, we believe that the sector has the potential to be a strong out performer in the investment cycle that will follow.

Source: http://www.indiainfoline.com/Markets/News/We-Are-Bullish-On-Information-Technology-Healthcare-and-Financials-Sector/4077527762

Gold wins the 2011 returns chase; beats all asset classes

Those who bet on gold funds at the start of 2011 would have every reason to pat themselves on their backs for the good fortune.

In the race between different asset classes in 2011, gold funds won hands down, with domestic investors in them pocketing a 32 per cent return.

Among the investment options, equity fared the worst, with diversified funds losing 22 per cent in value. Debt options such as fixed deposits and short-term debt funds took the middle path, returning 8.5-9 per cent.

Diversifying your portfolio to include real estate or agri-commodities would have delivered a healthy gain too.

Equities sink

The year 2011 was a painful one for equity investors, with the BSE Sensex losing 24 per cent (as on December 17). Diversified equity funds contained losses better than the index, but still saw an average erosion of 22 per cent in value. The one class of equity funds that did well, FMCG sector funds, delivered a respectable 13 per cent return.

Within debt options, mutual funds investing in short-term debt delivered the best 9 per cent return. They were able to maximise gains by locking into certificates of deposit or corporate paper yielding 9-10 per cent during the first half of the year.

Long term debt funds averaged 8 per cent. If you invested in January, one-three year bank deposits yielded 8-8.5 per cent, though rates later rose to 10 per cent.

the top dog

It was, however, gold that proved to be the top dog among asset classes in 2011. Investors in gold exchange traded funds made a handsome 32 per cent gain. More than half of these returns came from the weakening value of the rupee against the dollar, which boosted domestic gold prices.

Global gold prices, which have dipped recently, closed the year with a 15 per cent gain in dollar terms.

Real estate prices too were on an upswing across the country. Residential property prices as measured by Residex (Source: National Housing Board) were up 20-25 per cent in the metro cities between January and September (the latest available data).

While industrial commodities did not do too well, agri-commodities were another offbeat choice that would have paid off this year. NCDEX Dhaanya — an index representing the ten most liquid agri-futures contracts in NCDEX — appreciated 30 per cent in the last one year.

What's ahead?

So, given that 2011 was a year full of surprises, which assets should investors bet on for 2012?

Quite a few fund managers and brokers predict a classic ‘reversion to mean', where gold may take a back seat while assets such as equities may stage a revival.

Institutional brokers and asset managers take the view that domestic demand will protect India from the global slowdown in 2012, leading to a bottoming out of corporate profits and stock markets in the early part of 2012.

In debt, the consensus seems to be that short-term funds may not repeat their 2011 performance.

With interest rates likely to fall, investors should look instead at long term funds, especially gilt funds that can gain from rate cuts. Mr Vishal Kapoor, Head Wealth Management, Standard Chartered Bank, adds a couple of offbeat asset classes to the above choices. “One theme we like is international equities.

“In markets such as China and north-east Asia, valuations, after correction, look attractive, though they can only be diversifiers to your Indian equity holding.”

If you retain your belief in gold, he also suggests buying gold mining stocks (available via mutual funds).

“We think gold equities are a good opportunity. Traditionally, gold equity has a high correlation with gold prices.

“They have the additional benefit of operating leverage. Gold equities have not caught up with gold commodities and we see no reason why they will not catch up.”

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2723979.ece

Is the rally in gold coming to an end?

Over the last few days I have become even more convinced that the upcycle in gold is coming to an end now and we will see a significant correction.

I have talked to a variety of investment advisors/ fund managers/ investors in general. The only commodity that everyone recommended a ‘buy' on was gold. It has become the most over-owned and over-sold asset — in terms of being sold as an investment idea.

Data coming out of Indian mutual funds is also reflective of the sentiment. Inflows into gold funds have been higher than that into equity funds over the last six months. This is despite the fact that the total assets under equity funds are more than 20-30 times that of gold funds.

Likely to stay at top

India has traditionally been the biggest consumer of gold in the world. This is not likely to change despite there being talk of China becoming the biggest consumer. The traditional jewellery demand in India is not a fad or fashion but something that is engrained in the Indian system. This is very different from buying into an asset class that is fancied and where the prices are continuously going up.

The significant increase in gold prices over the last few months have bought physical gold demand in India to a virtual standstill. According to the data coming out of the World Gold Council Gold demand in the third quarter of 2011 reached 1,053.9 tonnes, an increase of six per cent compared to the same period last year. This equates to $57.7 billion, an all-time high in value terms.

According to the World Gold Council's Gold Demand Trends report for Q3 2011 this increase was driven by investment demand which rose by 33 per cent year-on-year to 468.1 tonnes.

The demand for physical demand for the traditional purposes fell by 15 per cent in this quarter. Gold supply was 1,034.4 tonnes in the third quarter of 2011

Q3 demand dips

Overall, Indian jewellery demand in Q3 saw a 26 per cent decline in tonnage, when compared to the same quarter in 2010, to 125.3 tonnes.

The question then is, for how long can investment demand hold up the price of a commodity in light of falling end-user demand.

The most drastic example of this was the way in which oil prices fell in the year 2008 from levels of $150 to $30 in a period of just six months.

That is not to say that such a thing is likely in the case of gold. However, the truth of the matter also is that lot of investment demand is trend-following demand and also exists because of the fear psychosis that prevails globally today.

Investment advisors and asset allocators find it easy to sell Gold ETF's to investors who are running scared of investing elsewhere.

In a number of European countries investors are reluctant to put deposits in the banks of their own countries.

Similarly, given the way global equity markets have performed and the kind of volatility that we have seen investors are unwilling to allocate much to equities at this stage.

Clear view required

As a result, deposits of banks perceived to be safe and bonds from Germany, UK and the US have become safe haven investment plays.

Besides this, gold is perceived to be the reservoir of value (and not without reason). However, investors investing into gold need to be clear of their expectations from this asset class.

The probability that gold will yield much below what investors can earn via fixed deposits of banks in a country such as India where five-year deposits of the safest of banks yield near 10 per cent is extremely high at this stage.

As gold prices start to first stagnate and then fall, there will not only be low incremental flows into gold-linked investment products.

There could even be outflows. A large number of hedge funds that have built up significant long positions in gold might also go short as the trend reverses.

If gold prices start to first stagnate and then fall, there will be low incremental flows into gold-linked investment products. There could even be outflows. A large number of hedge funds that have built up significant long positions in gold might also go short as the trend reverses.

The author is CEO — PMS, Prabhudas Lilladher Group. Views expressed are personal. 

Source: http://www.thehindubusinessline.com/features/investment-world/article2723821.ece?ref=wl_features