After removal of some FMCG, IT stocks from benchmark index,
one can see that markets are much lower than they appear
With money printing in the US and days of monetary and
fiscal stimulus behind us, one can only expect a slow recovery in the markets
this time around, unlike the quick rebound in 2009, says Mr Anand Shah, Chief
Investment Officer, BNP Paribas Mutual Fund. In an interview with Business
Line, Mr Shah also discusses on what drives gold prices now why gold as an
asset class is not comparable to equity.
Excerpts:
There is a general view now that markets have factored in
negatives and valuations have reversed to the mean. But then does the earnings
concerns now make it less comparable with historic data?
Markets have corrected significantly and rightly so because
we are going through abnormal times because of the political stalemate for a
long time now, since the 2G scam broke out. And at the same time what we are
seeing in the European world, is also not something that we come across every
decade.
While we have all been saying that markets have reversed
significantly and valuations have become cheap, we also have to keep in mind
that in 2011, even as markets corrected, quite a few stocks and sectors have
run up and become expensive.
To that extent the dispersion in stock performance has been
very high in the last one year in particular. If you remove some of the FMCG,
IT and telecom stocks from the index, then you will see that markets are much
lower than they appear. To that extent they do offer value.
Can markets correct more? Yes it can - if not for local
fundamentals, it can, because of the Euro zone issues.
And remember, markets factoring negatives does not
automatically mean that markets will not fall more. In other words, it does not
mean that the price earnings ratio cannot shrink. In every bear market,
valuations have gone much lower than the fair value.
I clearly believe the recovery from here will be very unlike
2008, when it was a V-shaped recovery. Money printing happened in the US and
there was fiscal and monetary stimulus. But I think those days are behind us
and even the incremental benefits of money printing are not coming through. So
to this extent, I see a very slow recovery, more similar to the post-2000
period than the one seen in 2008.
Do you believe that issues such as huge repayment of foreign
currency loans in 2012 could lead to financial instability?
One point that we should remember is that not all of the
foreign currency borrowings would be required to be rolled over or refinanced.
Quite a bit would be buyer credit and the same would be converted into rupee
loans once they get the supplies. Yes, it is definitely a cause for worry that
$80-90 billion worth of loans to be repaid. But to believe that all of these
will have to refinanced by borrowing locally in rupee is taking an extreme
view. Companies do have some reserves. Even if we do have to refinance, there
are a different set of consequences. There will be a further liquidity
tightening in the rupee and 10-year yields will go up once again and so on. But
all this will not mean that we will become financially unstable.
If the RBI has not intervened in the foreign currency market
so far and allowed the rupee to float, then they are aware of these
consequences and may well be making sure that the resources are available at
that point in time if it is required. So to that extent, I am not worried that
such a scenario will lead to financial instability but I am worried that it
will once again lead to interest rates going up, just as we are beginning to
expect it to come down.
Crisis like the one in Europe now, may affect financial
markets and not necessarily our economy. Our economy is not too
export-oriented.
Gold has become a favourite asset class for investors. It
has also outperformed equities even over a five-year period now. Can this out
performance continue?
Gold is a potential investment and should form part of your
portfolio but can simply not be compared with equity performance. This said,
the exceptional circumstances in the world economies have led to gold being an
out performer. That simply means that it is a one-off performance. Also, there
is hardly any active fund management in gold because it has very little
intrinsic fundamentals. Equity funds on the other hand have active fund
management.
In equities I have the opportunity to invest in hand-picked
companies run by good managers and invest in the growing Indian middle class
story. Companies such as Nestle or Jubilant Foodworks grow based on this story.
Gold can never outperform such growth stories. Gold may have
outperformed overall markets but not any specific sector or theme that was in
vogue in a particular market.
Source: http://www.thehindubusinessline.com/markets/stock-markets/article2735674.ece?ref=wl_markets
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