Don't Expect Markets To Give Very High Returns This Year - Prasun Gajri, HDFC Life Insurance - The Economic Times

Don't expect markets to give very high returns this year: Prasun Gajri, HDFC Life Insurance - The
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Don't expect markets to give very high returns this year: Prasun Gajri, HDFC Life Insurance
By ET Now | 13 Jul, 2013, 05.08PM IST
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In an interview with ET Now's Nikunj Dalmia, Prasun Gajri, CIO, HDFC Life Insurance, shares his views on the markets. Excerpts: ET Now: The big picture is that macro is looking slightly challenging, money is moving out of the markets and crude prices are refusing to come down. Prasun Gajri: Yes, the macro is clearly challenging and that is what is reflected in the way the rupee has been behaving. So that is a clear indication that any capital inflow or outflow, which happens very quickly, can lead to a large change in the way our macro is positioned. So that has been a problem for a while, it is just getting accentuated.
The market today is in a complete risk off mode where we
ET Now: Is it a time now to hunker down all the recovery expectations? Prasun Gajri: If you are looking at current account that is a challenging problem,, which is not going to go in a hurry. Clearly, one can argue whether it is $80 billion or $90 billion, but we have to fund somewhere to the tune of $80 to $90 billion every year at least for this year and that will require reasonably benign global flows. Therefore, that problem remains. On the fiscal side, while the intentions from the government do seem to indicate that they
continue to give higher multiples to sectors where the fundamentals are deteriorating, says Prasun Gajri
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Don't expect markets to give very high returns this year: Prasun Gajri, HDFC Life Insurance - The E...
want to control the fiscal at 4.8% of GDP, it is going to be a very tough challenge given the slowdown in the economy, the tax numbers for the first two months, little progress on the disinvestment, and food security bill. Inflation definitely seems to be under control. So that is one big positive which has emerged. Interest rates have not really moved up too much despite the rupee cracking. So that correlation between the rupee falling and interest rates also rising seems to have broken down a little bit over the last few days. Tat is something which is again a positive sign. ET Now: The argument for Indian equities at least for next one year is not very constructive and given the kind of macros we are working with looks like that we could be in a range for another one year?
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Prasun Gajri: We could be in a range for another one year. I do not think there is too much debate about that. For the markets to really move out of the range, something has to happen either positive or extremely negative. So I would agree that the range is there, but having said that what sectors do well and what do not may not necessarily follow what has been happening in the past and that is going to be something which could be different. We saw some outflows in June, but that was hardly anything compared to the inflows which we have seen this year and in the earlier year as well. So if they sell what they own then clearly some of the stocks which are at very high valuations will not do so well and some of the stocks which are at completely beaten down valuations may sustain. So clearly what outperforms, what underperforms is something which remains to be seen. The market today is in a complete risk off mode where we continue to give higher multiples to sectors where the fundamentals are clearly deteriorating, but the valuations are higher than what they were 12 months back and there are some other sectors where the fundamentals are clearly weak, but the valuations are just getting beaten up every single day. So clearly that dichotomy may change over the next 12 months, especially if you see FII outflows and ETF outflows from the Indian market that is something which may undergo a change. So the nature of what performs in the market or does not perform in the market could be interesting.
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ET Now: Do you expect that Q1 numbers will be rather noisy given the way how the rupee has moved for the quarter gone by, what has happened to bond yields and commodity prices? Prasun Gajri: See there could have been noise, but the fact is that the rupee movement does not tend to appear in the P&L given the way the accounting is done. It tends to go into the balance sheet, so it does not necessarily make it all that noisy. Having said that, I do not think there are any great expectations from this quarter. Most people anticipate virtually zero to very-very low growth for this quarter. So we are not really building in any major positive surprises. The interest rates have moved, that is something which has been the case for a while. So I do not think that really clouds the things, but overall no major expectations from this quarter.
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ET Now: So what could be the next big trigger because you are sounding more bearish than bullish to me? Prasun Gajri: If I have to talk about the economy it is a more balanced view where we will see probably better growth, but structurally the economy needs to get back to 7-7.5% growth. We will be stuck around 5.5-6% for a while if we do not change that. On the market, clearly the market is bipolar while the valuations may look reasonable from averages perspective, there is a part of the market which is completely trading at the lows post the global financial crisis and there is another part of the market which is trading at all-time highs in terms of valuations. We are seeing a relative slowdown. Obviously these categories are still doing well, there is a relative slowdown, but do the valuations really justify that? That is something which will remain to be seen and second aspect is if there is actually a sell off in the Indian equity markets from the global investors, I guess the stocks which will be more vulnerable are the high valued stock. So I do not have major expectations from this market. I don't think that it can give me a very high double digit return this year, but you could actually make reasonable returns if you get your sectors right. ET Now: If you are of the view that one should still be buying into high beta and one should not get obsessed with quality, what are the options which are left? Prasun Gajri: No, I am not suggesting either of the two strategies. One has to follow a balanced approach. I do not think it is a market which has helped being in high beta very clearly, but having said that it is not a market which is always going to help being in quality. So that is a distinction one will have to start making at some point of time and have that balanced approach to the portfolio. If you look around, I cannot get into specific names, but there are enough stocks which are trading at post-2008 lows with may be weak fundamentals, but they are not as bad as being made out. So it is a stock-specific market, it is easy decision to be safe today. It is a safe decision from a fund manager's perspective. It is an easier decision, it is very little chance of you going wrong effectively, nobody is really going to question you, but having said that is where I do believe there could be some sense of complacency which could be set in and that gives an opportunity to really look at that from a very different perspective. ET Now: What do you make of the global mood? One is getting a sense that we are staring at a divided world and emerging market equities are underperforming developed market equities.
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Prasun Gajri: The story which has been for a while is a stronger US growth and weaker Europe and probably a little bit better Japan and a weaker China. Now that is something which seems to be driving the global economy at the moment, and at the margin that is something which is going to drive the global asset prices as well. Now the question remains how strong is really the US economy? The indicators we have seen so far do point out that it is coming out from the lows, but how strong does it really get? We are still talking about 2 to 2.5% kind of growth!
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The fiscal situation in the US is still nothing great and it remains to be seen if once the QE starts tapering off whether the economy really stays as strong as it is being made out to be or are there repercussions of higher interest rates in the US and the economic growth in the US because we have clearly seen the bond yields and the mortgage rates rise fairly substantial in the US. The emerging market will still give you between 5 and 7% kind of growth, the fiscal situation in emerging markets is still better than most of the developed world and the opportunities in the emerging markets could still possibly be better than a lot of the developed markets. So while on a cyclical basis, short term basis what you are saying is right, but structurally I do not think the emerging market theme is broken. Yes, there is a slowdown in emerging markets, but clearly if the US actually picks up, the emerging markets also should do well and once that happens you could see the fund flows back to the emerging markets and emerging markets again starting doing well. So it is a fairly linked process. It is difficult to write off the emerging markets so quickly and so soon. ET Now: Let us look at the local fund flow situation whereas LIC has become a net buyer. What are local insurance firms doing, are you also putting money to work or redemption is still a problem? Prasun Gajri: The local insurance companies are not necessarily getting the flows at the same pace as they were getting. I do not think their net redemptions are at a very serious level, but I do not think the inflows are very exciting either. LIC seems to have been a big buyer, but clearly LIC was a big seller in the Jan to March quarter when most of us and other private insurance companies were clearly buying. So they had a large amount of accumulated cash which has been put to work now, but overall I do not see too much of fund flows into the equity markets for the domestic institutional investors at that moment. ET Now: When do you think will be the turning point where retail investors will start pulling money out of fixed income products and they could revisit equities? Prasun Gajri: Equity market has to do well for a while and sustain itself and get some positive buzz around it for the retail investor to come. See a larger amount of retail investors whosoever have entered in 2007-2008 is a complete dissolution and nothing really to blame the investor because the markets have been like that and therefore it is going to take a little bit of time, markets have to sustain, real interest rates have to become positive. Only then one will see the retail investors being keen on the equity markets. So it could be a little bit longer than one anticipates.
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ET Now: Let us look at currency sensitives now. The consensus call is that it is time to buy into pharma, IT, it is time to buy companies which will benefit because of weak rupee. Do you see there is merit in this trade?
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Prasun Gajri: Currency is a big beneficiary for sectors like pharma and IT. For pharma it is a bigger positive. For IT it remains to be seen while it is a positive, it clearly allows them a lot of levy, but if you really look at it, the margins of IT companies have actually shrunk over the last 12 to 18 months despite a very significant rupee depreciation. That tells me that while it is good for their business, a lot of those benefits tend to be spent away either in terms of pricing, or further expansion, or further spending, or further investments in the business and it is not getting reflected in the margins. So while in the short term it is positive, I would be a little bit wary of really putting that into numbers over the longer term. IT companies also depend on how the global macro plays out and how the growth in US really pans out and therefore what is the demand situation for them that is to my mind a much bigger factor and will influence some of these names much more. ET Now: What is the best way to approach consumers? Again the Street is divided on what exactly it should do when it comes to consumer names? Prasun Gajri: It is very easy to say get out of consumers but I do not think people would be very happy to get out of consumers because that is a trade which has played over the last two-two and a half years without any problem and it is a fairly easy trade. None of these companies are going to lose you any significant amount of money to be honest. You may get a 5%-10% correction, but there could be a long time correction in these names. So that would be a worry. If I were to really look at it, two or three things stand out. One is I would be more bullish on the rural sector side of the consumption than urban consumption. So clearly put more money to work on ideas which are more reliant on rural consumption than urban consumption. That is one aspect. Look where the earning growth is still reasonable. So, if the earning growth is still reasonable, if the earning growth is going to be 8% to 10% or 10% to 12% and the valuations are 35-40 times, this clearly does not make sense but if the earning growth is still going to be between 15 and 20%, you might as well play the valuations and stick onto it. So one has to differentiate between the FMCG names, which has not really happened so far. ET Now: Are you still hiding into defensives or are you preparing your portfolios for the next growth cycle, so there could be near-term pain but there could be a lot of long-term gain? Prasun Gajri: Well, in fact we have taken a lot of near-term pain because we have been aligned purely on valuation basis, which has not really worked. We are sticking to a broad strategy. While we may look at hedging our bets a little bit here and there, but a broad strategy has been to look at stocks where we believe the valuations are pretty much reflecting all the negative which can be there and these could
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be good bets over the next 12-18 months whenever the market decides to become much more valuationoriented. That strategy has not really worked for a while, but that does not mean it will never work.
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So we need to kind of take a balanced approach and manage that, but our bias will clearly be towards something which is valuationoriented. ET Now: But what happens in a scenario where the change is not strong or the economic recovery really disappoints in the coming quarters? Prasun Gajri: I do not think there is a major correlation between high GDP growth and very good returns from the equity market. So the markets were pretty much discounted. I would not be too perturb if the GDP growth numbers do not really add up to 6% plus. As long as the broad valuations are aligned with what the earning growth in some of these names is going to be, one has to continuously focus on earnings growth and valuations. It is just that over a shorter period time some of these strategies are not necessarily working because it is a clearly risk on, risk off trade and where you want to even in a risk on trade money is just pouring into the same defensives clearly because people believe that if they want to exit, it is much easier from there and these stocks are pretty good in terms of fundamentals and the earnings growth is reasonable. Now that is one strategy which has worked. ET Now: At a time when FIIs are selling because of redemption pressures, which are some of the key names, ideas or group of stocks where you are putting money to work? Prasun Gajri: I do not think you have seen that crack as yet. We would be obviously waiting a lot, as a consumption theme I really love that theme that is a clearly a longer term theme in India, but we are obviously watching a number of stocks. As and when the valuations start correcting, we would be looking to buy into those names, but clearly we have not seen that correction as yet. Even if there has been some selling, we have not seen that correction in any meaningful manner. ET Now: So where is deep value in this market? Is there a lot of value in beaten down PSU banks, thrashed out metal stocks or under-owned industrials? Prasun Gajri: Select PSU banks clearly are reflecting possibly a really bad scenario and reasonable dividend yields with price to book at the lowest for the last five to six years. So there is value in some of those names. Again one will have to be selective. ET Now: What is your take on interest rates?
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Prasun Gajri: Clearly the rate cuts are off the table. I do not think the RBI is going to do too much in the July policy. So I do not think the market is anticipating that either. Having said that, two factors are at play. In the short run yields are going to be range-bound, nothing much is going to happen because there are really no triggers. I would be a little bit concerned on the fiscal situation. If the government decides to borrow more, that would be a cause for concern, but having said that and given the fact that the credit growth in the system seems to be fairly lacklustre, the SLR numbers of the banks have actually come down over the last six months.
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There should be enough demand for the government paper and that could help keep the yields under check. My sense is that if the yields reach say 7.75%, you could see a very strong buying from the domestic investors in the yield and the retail investor is still convinced about that. Lots of retail investors miss the first leg of rally on the bonds and they would be interested in catching this rally if it really gets back to 7.75 odd levels. So my own sense is, it is a range-bound market with a positive bias at least for the next three to four months. Then the fiscal situation could start impinging on it and depending on how the data really comes out, one would have to really take a call on the interest rates. But in the short term, range bound with a positive bias seems more likely.
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