26... www.dnaindia.

com

Mumbai, Tuesday, July 22, 2008

Not the bottom yet, but time to

Getting sleepless nights seeing the Sensex gyrate to the tunes of rising oil prices? Hurt by inflation? What about
There are 3 factors
politics? Will the FIIs continue to stay away from the Indian stock market? What should you do with your that the retail investor
investments? Should you stay put or exit? must keep an eye on:
Just relax, is the message from top fund managers to investors who are in the game for a period 3-5 years. first is the Israel-Iran
Madhusudan Kela of Reliance Mutual Fund, Sanjay Sinha of SBI Mutual Fund, A Balasubramanian of Birla Sun conflict; second is check if
Life Mutual Fund, Mihir Vora of HSBC Mutual Fund, Sandip Sabharwal of JM Financial Mutual Fund and inflation is peaking -- don’t
hope to invest when inflation
Sanjiv Shah of Benchmark Mutual Fund came together to launch the first of the DNA Money Conversations series
falls to 6%; thirdly, the RBI
of round-table conferences on Friday, July 18. today is worried about infla-
Anchored by DNA executive editor R Jagannathan and business editor Raj Nambisan, the topic of the round-table tion, not growth. Somewhere
was the current macro-economic environment and the fundmen’s message for the retail investor. down the road, it will start to
worry about growth. That’s a
Given the economy and investor wealth, what is your message to the investor? Balasubramanian: The point is, everybody wants to come in at 21000 Sensex but Madhusudan Kela,
Sanjay Sinha: Some bit of the message is reflected by the investor himself. If you nobody wants to come when it’s 13000. sign of bottoming out... Head-Equities,
see the funds industry, it has not grown the same way it did last year. The second thing From the overall economy point of view, in the last few years, we were talking of Reliance Mutual Fund
is investor reaction. In the early part of the previous rally, the participation of the re- fiscal deficit coming down, now we have fiscal deficit going up to 6%. The Indian cor-
tail investor was very modest, almost negligible. The participation steadily grew, porate was leveraged. In the 1990s, cost of borrowing was high. For every rupee in- er is the demand and vice versa. That’s because of greed and fear. However, scientif-
reaching the maximum in the last 12-18 months. Equity as a percentage of financial vested, there was Rs 2 to Rs 3 debt. Today the balance sheet of Indian corporates is ically you try to justify, much money will not come at the bottom of the market. But
assets continues to be at a low proportion. Even today, most people don’t own a sig- much stronger and the valuation lot cheaper than in many international markets. I think the industry’s effort and the media role should come in here.
nificant part of their portfolio in equity. So, even a 40% fall does not erode their wealth Assets have grown in last the 3 years much faster than in last 10 years. There is a lot of wishful thinking that when mutual fund redemptions happen, that
significantly. So, why have investors come in last 12-18 months? They have now be- Look at the reality of funds, how they have grown. is the time market will bottom out. That will remain just wishful thinking.
gun to believe that the economic growth is going to be sustainable not for just one Between January and March, mutual funds could almost match the selling pres- About 85% of the retail investor base of 65 lakhs have put in less than Rs 50,000.
year or 18 months. The best way to participate is through equity ownership. That is
one part of assessment. The second part is the erosion of wealth.
The market went up by 42%, 46% and 47% in 2005, 2006 and 2007, respectively. From
the peak we have fallen 40%. If you look at history we have fallen from top a num-
ber of times and bounced back from there over a period of time. In the past, when
the market has fallen so much in 1992 and 2000, it rallied 100% plus from bottom in
2 years time. At present, there is an aura of despondency due to high inflation and
other concerns. But we need to look beyond that. We need to see if this is structur-
al in nature or is it just short term. It doesn’t look structural; it is short-term. I think
this is a buying opportunity.

If you are looking at a

3-5 year timeframe, I
can see very little
minuses. We have four
pillars — demographics,
infrastructure, consumption
and outsourcing. There are
very few sectors that won’t
do well in each of these
spaces... On none of them
can you say with conviction
that they won’t do well in the Mihir Vora,
next 3-5 years. Head- Fund management-equities,
HSBC Mutual Fund

Madhu, investors understand that markets keep going up and down, whether they them-
selves are investing or not. At this point in time, how does one protect capital —- when
the markets are down?
Madhusudan Kela: Let us unambiguously say this: If you are an investor, if your
timeframe is 3 to 5 years, then these are the best times to buy equity with a lot of stock
prices demonstrating the kind of fear which are not real if you take a five-year view.
From an investor’s perspective, for people who have no substantial part of their
savings in equities as an asset class, this is very clearly time to systematically invest.
In the near term —- say six months —- things may deteriorate. Like Sanjay was say-
ing, things don’t look structural. High inflation, interest rates, crude…these are not
things I can see lasting for more than six months.
On the flip side, if you don’t invest in equity, you put your money in a bank. There
wealth is going down for sure. With 12% inflation and 9% interest rate, you are los-
ing money on bank deposits. In equities at least you have a hope of making positive
returns. But the answers are not simple.

Sandip, looking at macro situation, the widespread expectation is that the west will
slow down. How do you see the fundamentals of economy in next two years? Investors
will have to derive their decisions from that. What is your assessment ?
Sandip Sabharwal: The concerns are well known, they are talked about in me-
dia all the time. We know there’s inflation, political uncertainty and tight monetary
policy impacting banking and capital goods sectors. We have to see, like Madhu said,
if this is structural or is transitory in nature, which may remedy itself over a peri-
od of time.
My view is that a slowdown in the western economy is absolutely essential for In-
dia and China to emerge as the next growth drivers of the world. The demise of Japan
led to the emergence of the US. Just see the kind of return the US stocks gave during
the time of their emergence.There are structural issues in the US, which will lead to
the decline of US economy in the next 10-15 years. This will lead to the emergence of
other countries especially India and China and many be other economies like Brazil
and Russia may also do well. Demographics-wise, India is best poised. Resource-wise
Brazil is placed well. China and Russia also have lot going for them.
Whoever is a long term investor should look at investing in a structured manner.
Today inflation is at 12%; six months ago, it was 4%. One year down the line, it may
again go to 4%.
The drivers of inflation are unlikely to persist at such elevated levels for extended
periods of time. There can be high interest rates, there can be low interest rates. But
will the high interest rate kill the investment and consumption psyche of the corpo-
rates and households? I don’t think that’s going to happen. The balance sheets are
leveraged to lesser extents.
Today it’s a crisis of confidence caused primarily by news flow. As we do micro-
analysis, as we meet a lot of corporates, we don’t see the kind of slowdown as reflected
in the macro numbers.
Madhusudan Kela: For a longer-term, the situation is far looking worse than what
it is today in the current year. There is a delta (unexpected negative impact) of $75
billion, which you had not anticipated when you made investments two years ago.
The delta came in two forms. One was rising oil prices. India has had to pay $50 bil-
lion more than what was anticipated three years ago. And $25 billion dollar less in-
flow by foreigners through foreign convertible bonds, equity etc put together
So, for a trillion-dollar economy (there has been) a $75 billion negative unexpect-
ed impact, which is why we are seeing a chaotic situation. If you expect this $75 bil-
lion delta to occur year after year, then you must be very pessimistic —- what the me-
dia is today widely. If you think there is a scope for another $75 billion delta, then
crude must go to $300 per barrel, in which case we are all dead anyway.
We have seen oil prices moderating suddenly over the past few days. We don’t know if
it’s a long-term thing. But oil prices have transferred wealth from one set of people to
another. Sanjiv, do you see any positive in that for India as far as liquidity and money
flow are concerned? Or is it all bottled up somewhere else?
Sanjiv Shah: Before I answer that question, look at the total Indian investment in
the equity markets, it is minuscule. As Sanjay was saying, Indian investors haven’t
really taken huge bets on economy. They have been lending to the government at the
end of the day. Until now, they didn’t have pensions, didn’t have anything else. Every-
body wanted capital safety because of which we didn’t see flows into equity. As we go
forward, you start realising that by keeping money in a bond or a bank deposit the
real value of money will go down dramatically. If I am a investor I got to start look-
ing at asset allocation. Forget growth, if I want to protect the value of my capital, I
have to look at assets like equity. That is going to bring more and more flows into eq-
uity. If you look at market valuations, I feel more and more money has to move into
equity. If you look at RBI bonds, they have collected Rs 100,000 crore. What is driving
that? Safety of capital. Going ahead, safety of capital will drive more money into eq-
uities.
Then comes international flows. International flows, the ability to take risk is com-
ing down due to problems in the US. Money supply will come down. There has been
twenty years of high growth in money supply. That will come down.
Bala, from an investor’s point of view, this should be the beginning of the right time to
invest. Why is not the fund industry able to sell this idea?
■ STREET TALK: (From left to right) : Sandip Sabharwal, Sanjay Sinha, A Balasubramanian, Sanjiv Shah, Mihir Vora and Madhusudan Kela warm up for the DNA Money
sure from FIIs. That is the level of penetration we have achieved as an industry leader. I am sure if
Not only mutual funds, insurance has also grown considerably. The industry has the media plays a more positive role, we can take the message across to them.
matured so much. Investor awareness has also increased significantly in the last one Sanjiv Shah: The Indian investor has no choice to move into equities. Until now,
year or so. People are asking when should I invest in markets. But is it possible to real rates of interest have been higher. But with the scenario changing, we think the
time market? It’s very difficult. 65 lakh number will move into 65 crores in short time. That process is on and it’s go-
Despite many crises, in the last ten years industry growth has been 26% com- ing to get accelerated.
pounded annual growth rate. Month after month SIP (systematic investment plan) Mihir, quite obviously the investor has not panicked. He is not pulling the last rupee out
flows are increasing. of mutual funds. How would you sum up the macroeconomic and investor sentiment in
The uncertainties that we are facing are global in nature. The Reserve Bank of In- terms of plusses and minuses? Do the pluses outweigh minuses?
dia governor in his latest speech he said The Indian financial system is much stronger Mihir Vora: If you ask this question in terms of timeframes, if you are looking
than US. These are facts which are not coming to foreground. Therefore it’s an op- at a 3-5 year timeframe, I can see very little minuses. We have three or four pillars —
portune time. - demographics, infrastructure, consumption and outsourcing. We look at sectors in
Sanjay Sinha: To bring to the fore the role of mutual funds, just look at the num- each of these themes. There are very few sectors that won’t do well in each of these
bers. In the whole of 2007, they bought Rs 6,700 crore. This year they bought over Rs spaces. Whether it is capital goods, construction or FMCG, Telecom or information
10,000 crore. So participation of mutual funds has been far higher. Look at the con- technology. On none of them can you say with conviction that they won’t do well in
tribution they have made to change the investor psyche. the next 3 to 5 years. In the short term, there are concerns. The correction should
Look at the two falls of May 2004 and May 2006. In these, the investor reaction was have ended —- if we had the same global macroeconomic and commodity prices —-
negative. But on both occasions, they were inactive. This year, mutual funds are buy- around Sensex 16000-17000. The fall from there was due to the incremental negatives
ing. How are they doing so? Because they are seeing inflows. In our funds, right from that have happened post correction: oil shooting up and other commodities rising.
January, we have seen net inflows almost everyday. I travel all over country. We go to The short-term scenario can’t sustain. We are already seeing demand destruction.
Tier II and Tier III towns. They are not asking should they put money into equities. The world cannot afford such high commodity prices, more contraction of demand
Investors are asking when they should put money. will happen and when that happens, we will see economies like India and China who
Madhusudan Kela: Equity is the only commodity where higher is the price, high- are net users of these commodities, doing well. Globally, if you look at the financial
markets, till last year India and China were stars of global system. Now with the rise
in commodity prices, despite the crash in global markets, countries like Brazil and
Russia have gone up because they are commodity exporters. Once the commodities
My view is that a slow- correct, sooner or later, it’ll back to China and India, which are local stories.
It’s only a matter of time. Structurally, the story is intact. Where we are today is
down in the western partly our own making. We should have probably done more in the infrastructure
economy is absolutely space faster
But a 10% growth may not be possible from here. But 7-8% is very much sustain-
essential for India and able. It’s just a question of time.
China to emerge as the next Madhusudan Kela: The last point on the economy. If you take a three-year view,
even if oil prices remain where they are today, India will actually spend less money
growth drivers of the world. by 2011 compared with today because we will by then have $25 billion worth of crude
and crude equivalent savings happening due to availablility of local crude and local
...there are structural issues gas. And, if you look at the picture of $120 billion dollar worth of oil exports, and if
in the US, which will lead to you take my $25 billion number at face value, on a $1.7 trillion economy, in percent-
age terms, the expenditure is quite reasonable. Remember, here we are still assum-
its decline... ing 5% growth in oil demand.
This will lead to the emer- Point no. 2 is that let us look at the Indian economy vis a vis global — our growth
falling from 9%-10% to 7.5% looks like chaos. Imagine a $12 trillion economy like the
gence of other US —- they are struggling, struggling to grow on a notional basis at 3%, including in-
flation, whereas here, including inflation, you are growing at 14%-15% (7% growth
countries. Demographics Sandip Sabharwal, and 8% inflation) this year, and continue to do so. I don’t think the relative impor-
wise, India is best poised. CIO-Equity, tance of India in the world of investing can be ignored for a longer term for institu-
JM Financial Mutual Fund tional investors. It’s a greed and fear game. People are so fearful they don’t want to
analyse and look beyond 6 months…