In an interview with ET Now, Vijai Mantri,
MD & CEO, Pramerica
Mutual Fund, speaks on the markets and the GAAR issue. Excerpts:
ET Now: Last two or three weeks have been tough and rough for money managers. Do you think uncertainty and indecision will continue to dominate the Indian markets in the near term?
Vijai Mantri: Volatility and uncertainty will continue to dominate the Indian markets in the near term. The budget is going to get passed in May. The key would be that in what format and with what addition or deletion the budget is passed. Another key issue is how the government handles GAAR. That will decide the future FII inflows because if you look at the ownership of the Indian equity market, there is a very little retail ownership. Actually retail investors are taking money out from the Indian equity market. So, whether we like or dislike we are continuing to depend on FII inflows and right now FIIs are not putting in money because of uncertainty on GAAR. One could also look at how the government is going to look at the fuel price hikes.
ET Now: What gives you the confidence that if the GAAR issue is resolved, foreign institutional investors will come back?
Vijai Mantri: There is no certainty of outcome in the business of investing, but you look at improving your odds. In spite of all the challenges India continues to grow at 7%. All global economies are facing some headwind, so does India. But a 7% growth in my opinion is not a bad growth. You look at what valuation are you buying this company. Then you look at the historical cyclicality of the Indian equity market. In our opinion, the worst as far as the corporate results are concernned is over in Q3. You look at the combination of all these factors and then you also look at the currency play. All these thing favour a little bit of allocation of foreign investors. We do speak to people and we just had a conference and the view is that people are more positive in FY13 than they were in FY11 or FY12. We believe that at the moment there is some clarity on GAAR. More money from FIIs would come and it is not that the people do not want to pay taxes, it is a question of uncertainty.
ET Now: Last two or three weeks have been tough and rough for money managers. Do you think uncertainty and indecision will continue to dominate the Indian markets in the near term?
Vijai Mantri: Volatility and uncertainty will continue to dominate the Indian markets in the near term. The budget is going to get passed in May. The key would be that in what format and with what addition or deletion the budget is passed. Another key issue is how the government handles GAAR. That will decide the future FII inflows because if you look at the ownership of the Indian equity market, there is a very little retail ownership. Actually retail investors are taking money out from the Indian equity market. So, whether we like or dislike we are continuing to depend on FII inflows and right now FIIs are not putting in money because of uncertainty on GAAR. One could also look at how the government is going to look at the fuel price hikes.
ET Now: What gives you the confidence that if the GAAR issue is resolved, foreign institutional investors will come back?
Vijai Mantri: There is no certainty of outcome in the business of investing, but you look at improving your odds. In spite of all the challenges India continues to grow at 7%. All global economies are facing some headwind, so does India. But a 7% growth in my opinion is not a bad growth. You look at what valuation are you buying this company. Then you look at the historical cyclicality of the Indian equity market. In our opinion, the worst as far as the corporate results are concernned is over in Q3. You look at the combination of all these factors and then you also look at the currency play. All these thing favour a little bit of allocation of foreign investors. We do speak to people and we just had a conference and the view is that people are more positive in FY13 than they were in FY11 or FY12. We believe that at the moment there is some clarity on GAAR. More money from FIIs would come and it is not that the people do not want to pay taxes, it is a question of uncertainty.
ET Now: Why are banking stocks underperforming despite the
rate cut? Most of the fund managers were of the view that if the rate cut is
announced, banking stocks will get derated.
Vijai Mantri: In our opinion Q3 was the worst quarter for the banking sector. The Q4 numbers or whatever results we are seeing in the private sector banks are pretty much above expectation. The effect of the rate cut will start bearing result not immediately, but over a period of time. The general sentiment about the fiscal condition of the Indian government is that there is a lot of uncertainty about the NPAs in the banking sector. That is the reason the banking sector has not reacted and the market is completely neglecting the numbers. But we are overweight on the banking sector because we believe this is a proxy to economy and with reduction in interest rates, the banking sector is going to benefit immensely and many banks are available at historical low valuations. If one has to look at making money over a couple of years, then one has to be in the banking industry. Right now it is a classical case of the bear market where all good news is being completely ignored and all bad news is priced in and the banking sector is witnessing that phenomena.
ET Now: Besides banks, do you think the market stance is going to be tilted more towards defensives given the kind of macro environment that we are currently in?
Vijai Mantri: People may do technical allocation to defensives, but defensives are not coming with cheaper valuations. Defensives are available at valuations which are much higher than they were in 2008. What kind of money you are going to make when you are buying stocks at 32-35 PE multiple? Right now there is uncertainty in the markets. People are looking at buying these kinds of stocks. But if you are a money manager, if you are not looking at protecting your NAV, you are looking at growing your NAV and you are looking at where are the odds of making or doubling or tripling your money, then beyond banking there are many sectors whose stocks are available at attractive valuations. There is a lot of uncertainty and that is the reason these stocks are available at lower valuations. We are underweight on the consumer staple, but we are more overweight on capital goods and industrial. We believe that capital goods are available at the lower end of the valuation.
ET Now: Stock performance is also a function of opinion. Defensives tend to do bad when risk is back. Similarly, rate sensitive and investment-oriented businesses or stocks tend to do well when growth is back. So globally what kind of scenario you think we could be staring at for the next six months because that scenario will tell us which are the group of stocks you need to buy and which are the group of stocks you need to sell?
Vijai Mantri: You made a very interesting point and let me link it with the previous question you asked. The banking sector has not done too well because of a lot of uncertainty on the global inflow. In our opinion Europe is going to do much better than it did last year. There is a clear realisation that there is a problem and one needs to tackle the problem. We would not see any significant bad news coming from Europe, but it will take many years to revive the European economy and the leadership is realising that.
Vijai Mantri: In our opinion Q3 was the worst quarter for the banking sector. The Q4 numbers or whatever results we are seeing in the private sector banks are pretty much above expectation. The effect of the rate cut will start bearing result not immediately, but over a period of time. The general sentiment about the fiscal condition of the Indian government is that there is a lot of uncertainty about the NPAs in the banking sector. That is the reason the banking sector has not reacted and the market is completely neglecting the numbers. But we are overweight on the banking sector because we believe this is a proxy to economy and with reduction in interest rates, the banking sector is going to benefit immensely and many banks are available at historical low valuations. If one has to look at making money over a couple of years, then one has to be in the banking industry. Right now it is a classical case of the bear market where all good news is being completely ignored and all bad news is priced in and the banking sector is witnessing that phenomena.
ET Now: Besides banks, do you think the market stance is going to be tilted more towards defensives given the kind of macro environment that we are currently in?
Vijai Mantri: People may do technical allocation to defensives, but defensives are not coming with cheaper valuations. Defensives are available at valuations which are much higher than they were in 2008. What kind of money you are going to make when you are buying stocks at 32-35 PE multiple? Right now there is uncertainty in the markets. People are looking at buying these kinds of stocks. But if you are a money manager, if you are not looking at protecting your NAV, you are looking at growing your NAV and you are looking at where are the odds of making or doubling or tripling your money, then beyond banking there are many sectors whose stocks are available at attractive valuations. There is a lot of uncertainty and that is the reason these stocks are available at lower valuations. We are underweight on the consumer staple, but we are more overweight on capital goods and industrial. We believe that capital goods are available at the lower end of the valuation.
ET Now: Stock performance is also a function of opinion. Defensives tend to do bad when risk is back. Similarly, rate sensitive and investment-oriented businesses or stocks tend to do well when growth is back. So globally what kind of scenario you think we could be staring at for the next six months because that scenario will tell us which are the group of stocks you need to buy and which are the group of stocks you need to sell?
Vijai Mantri: You made a very interesting point and let me link it with the previous question you asked. The banking sector has not done too well because of a lot of uncertainty on the global inflow. In our opinion Europe is going to do much better than it did last year. There is a clear realisation that there is a problem and one needs to tackle the problem. We would not see any significant bad news coming from Europe, but it will take many years to revive the European economy and the leadership is realising that.
We have been consistently bullish on the US economy and the
US market for the last couple of years. We believe that the US will surprise us
on the economic as well as the market front because of inherent strength of the
economy. The growth will come back. It will not be a big growth, but will be
muted. Also, more money will start floating into the market over a period of
time.
ET Now: What about autos? Do you think the volume story is going to take the likes of Tata Motors and Maruti given the valuations that they are already sitting on even higher?
Vijai Mantri: If you look at the auto sector, you have to look at specific companies. There will be challenges in the two wheeler sector because the volume growth will not be that high. Companies which are completely domestic demand driven will face challenges and companies which have some export exposure will do well. One also needs to keep in mind that implementation of metro across 10-12 cities in this country will have some impact on the auto demand in the long term. So, we are not overweight on the auto sector and we believe that with interest rate, inflation numbers and muted salary growth, the sector will face some challenges in the next 18 to 24 months.
ET Now: At a time when you are generally bullish on the GDP growth and you expect that Indian economy will grow at 7% plus, what makes you bearish on consumption? Yes, you are bullish on banks because you like consumption, but you do not like autos because you expect consumption to slow down?
Vijai Mantri: We need to look at the penetration of the auto industry. In smaller towns and some metros, penetration has been pretty decent and we do not see the kind of historical growth we have seen in auto companies going forward. It is not that we do not like these companies, but when you look at the valuations these companies are available and the expectations built in for the growth, the equation does not tally. We do not have any bad opinion about the auto industry, but at the sheer valuation they are available and the expectation of growth, we do not believe that the auto industry is going to go through those kind of growth except a few companies which are in different segment of the market. Companies which are more towards agri, in the rural economy will continue to do well. Even if you look at the growth which is going to come by, then you need to look at the sectors which give you high delta. Then you look at the valuation of various sectors and find that capital goods industrial and banking are available at much lower valuations and the growth expectation in these sectors is pretty muted compared to the auto industry. We always look at juggling all the balls which we have to play around and in our opinion as on date the odds are much more in favour of capital goods, banking and industrial, than the auto industry.
ET Now: What about telecom? Given the recent news flow on the 2G recommendations, do you think it is time to go underweight?
Vijai Mantri: We are already underweight on telecommunication because of two-three factors. One of them being the policy uncertainty. The second reason is that there is too much competitiveness. However, the numbers are looking little okay. The per usage number shows an upside trend after the downside trend for many months and quarters, but still we would remain little underweight on the telecommunication sector.
ET Now: What about autos? Do you think the volume story is going to take the likes of Tata Motors and Maruti given the valuations that they are already sitting on even higher?
Vijai Mantri: If you look at the auto sector, you have to look at specific companies. There will be challenges in the two wheeler sector because the volume growth will not be that high. Companies which are completely domestic demand driven will face challenges and companies which have some export exposure will do well. One also needs to keep in mind that implementation of metro across 10-12 cities in this country will have some impact on the auto demand in the long term. So, we are not overweight on the auto sector and we believe that with interest rate, inflation numbers and muted salary growth, the sector will face some challenges in the next 18 to 24 months.
ET Now: At a time when you are generally bullish on the GDP growth and you expect that Indian economy will grow at 7% plus, what makes you bearish on consumption? Yes, you are bullish on banks because you like consumption, but you do not like autos because you expect consumption to slow down?
Vijai Mantri: We need to look at the penetration of the auto industry. In smaller towns and some metros, penetration has been pretty decent and we do not see the kind of historical growth we have seen in auto companies going forward. It is not that we do not like these companies, but when you look at the valuations these companies are available and the expectations built in for the growth, the equation does not tally. We do not have any bad opinion about the auto industry, but at the sheer valuation they are available and the expectation of growth, we do not believe that the auto industry is going to go through those kind of growth except a few companies which are in different segment of the market. Companies which are more towards agri, in the rural economy will continue to do well. Even if you look at the growth which is going to come by, then you need to look at the sectors which give you high delta. Then you look at the valuation of various sectors and find that capital goods industrial and banking are available at much lower valuations and the growth expectation in these sectors is pretty muted compared to the auto industry. We always look at juggling all the balls which we have to play around and in our opinion as on date the odds are much more in favour of capital goods, banking and industrial, than the auto industry.
ET Now: What about telecom? Given the recent news flow on the 2G recommendations, do you think it is time to go underweight?
Vijai Mantri: We are already underweight on telecommunication because of two-three factors. One of them being the policy uncertainty. The second reason is that there is too much competitiveness. However, the numbers are looking little okay. The per usage number shows an upside trend after the downside trend for many months and quarters, but still we would remain little underweight on the telecommunication sector.
Source: http://economictimes.indiatimes.com/opinion/interviews/volatility-uncertainty-will-dominate-markets-in-near-term-vijai-mantri-pramerica-mutual-fund/articleshow/12933927.cms?curpg=3
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