S. Naganath |
"INDIAN EQUITIES
HAVE
A BRIGHT FUTURE IN THE LONG TERM"
Says S. Naganath, Joint President & Chief Investment
Officer,
DSP Merrill Lynch Mutual Fund
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How do you see the market situation today?
What is the outlook for Equity & Debt markets?
The market is currently in a listless phase owing in part to weakness
in the overseas markets as well as the build-up of expectations from
the new Finance Minister. First quarter results due in July will also
set the trend near term. While the outlook for equities looks attractive
over a 9-12 month horizon, having due regard for the underlying strength
in the economy, weakness in share prices could still be induced near
term if the US market continues to weaken. This, of course, should
provide investors with a good reason to buy, since corporate fundamentals
and valuation are beginning to look very attractive.
The debt market began the quarter on a strong note with the yield
on 10-year government securities declining to around 7.15%. With a
benign outlook for inflation, expectations of the credit policy in
April revolved around a possible reduction in the bank rate as also
a CRR cut. The latter was effected (50 bp cut) while the former was
to be considered at a later date. Bond prices rallied smartly on these
developments. However, the rally was rudely interrupted by border
tension in May. The yield on the 10-year government securities headed
up to over 8% (8.12% at the high). Eventually, as tensions receded,
bonds staged a massive relief rally that took the 10-year yield closer
to 7.50%. Aiding the optimism was a 25 bp cut in the repo rate in
June. Once again, liquidity is to the fore. The current bias towards
steady to softer interest rates, therefore, is likely to remain the
case in the next few months.
When can we expect an economic upturn
or has it already been started? What as per you are the visible
signs for economic recovery?
While an economic recovery appears to be underway in the US, it
will most likely be a weak recovery leading to a limited growth
in profits. This is not going to help equity valuations.
Weak earnings growth coupled with accounting controversies surrounding
various companies, will lead to a range bound market, with a bias
to the downside. Pressure to deliver earnings growth will force
many companies to cut costs. Outsourcing could increase significantly.
As perceived investment returns decline, capital could move overseas
in search of growth. Emerging markets, in this context, are receiving
a lot of investment attention, after a long hiatus.
In the Indian context though, an economic recovery seems to be getting
underway.
The feel good factor appears to be slowly returning and retail consumption
appears to be picking up. Auto sales were amongst the early indicators
of a revival in the economy. Demand for steel is improving and cement
should follow suit post monsoons as construction activity begins
to pick up, especially in the infrastructure sector.
What are the steps expected to be taken
by the Government to boost the economy as a whole?
The government has emphasised its intent to put many infrastructure
projects on the fast track. This will boost the demand for commodities
such as steel and cement besides generating employment. All of this
has a positive impact on the economy. Additionally, the Finance
Minister has said that he will seek to boost household consumption
by putting more money in the hands of consumers. This would be a
positive catalyst for consumption and therefore growth, as well.
Where is our equity market heading for?
How is the new generation hedging products going to benefit the
equity markets?
Economic fundamentals are beginning to look up and corporate earnings
growth are attractive when compared against current valuations for
stocks. However, in the near term, equities may witness weakness
if the US stock market continues to slow down. However, to the extent
such weakness in Indian equities is caused by external factors,
it could be an interesting opportunity to add to equities.
What, according to you, will be the happening
sectors in the Equity market in Financial Year 2002-03? What are
the reasons? Will the IT sector be able to come back?
I expect to see the entire market to do well, once we witness the
jump in liquidity, both from internal and external sources, as I
outlined earlier. However, it is still possible to identify some
sectors that will do better than the rest.
I am very bullish on the national highway project acting as a major
catalyst for growth in the next 5-10 years. We have yet to fully
comprehend the efficiencies and positive changes it will bring to
bear on our economy. The auto sector will be a major beneficiary
of rising demand for vehicles, especially since auto financing has
caught on in a big way and is highly competitive. Cyclical sectors
such as cement and steel should also do well as construction activity
begins to gather momentum.
Bank stocks will remain an interesting play, especially if there
is some further consolidation and merger /acquisition activity in
this sector. The full impact of technology upgradation will be visible
going forward. It should lead to a further re-rating of the sector.
The technology sector is understandably going through some tough
market conditions now. However, I expect the business environment
to improve as profit pressure and the need to control costs for
foreign companies propel them to adopt the outsourcing model quickly
and more completely than they may have initially budgeted for. I
am perennially optimistic about the Indian pharmaceuticals sector.
This sector has made a mark for itself in the West by being aggressive
in terms of seizing new business opportunities and not fighting
shy of the challenges being posed in this regard. And lastly, the
fast moving consumer goods sector will be one to keep an eye on.
What as per you is interest rate outlook?
How is it going to affect the performance of Debt Mutual Funds?
Liquidity will remain abundant and interest rates will remain soft.
Inflation continues to remain benign and there is no concern, as
yet, that the government will exceed its borrowing targets for the
year. Sure, volatility will increase depending on news flow and
circumstances external to market liquidity. However, the fundamentals
underpinning a positive outlook for bond prices remain undiminished.
Debt funds will obviously not be able to match the performance of
last year, which was extraordinary in its scope of decline in interest
rates. Expectations for return from debt funds this year therefore,
ought to be more sober and measured.
Fund managers are increasing exosure to
lower rated papers to take advantage of the credit-spread compression.
What are the likely impacts of that keeping in view of their risk
management style?
Corporate spreads are declining across the board and one has to
be careful in assessing if this decline will sustain and also across
the nature of credits (i.e. AA vs AAA) that are currently witnessing
such a decline. No doubt, excess liquidity in the system is causing
a scramble for assets. However, as rates trend lower, corporate
issuance may gather pace as companies seek to lock in long term
rates at today’s low fixed rates. This may eventually lead
to spreads expanding out once again, albeit gradually.
What is DSP Merrill Lynch Mutual Fund’s
Investment Philosophy?
Our investment style and philosophy has always laid emphasis on
consistent performance while assuming a level of risk we think is
prudent. In our debt funds, we focus on credit quality, as also
the need to be nimble to profit from market opportunities. In our
equity funds, the investment style focuses on identifying trends
well ahead of time, qualitative and quantitative analysis as well
as developing a perspective on macroeconomic variables and their
impact on the direction and momentum of economic growth.
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