Vetri Subramaniam, CIO, Religare Invesco Mutual Fund, shares his views during a panel discussion at the Morningstar Investment Conference held in Bengaluru.
How are foreign institutions viewing the market? What are their thoughts about what the government needs to do to move the market forward?
I think you can sort of gauge the foreign sentiment on India by just looking at the kind of flows we are witnessing into the country. I know people were a little disappointed because they have dipped this year. But there have been strong flows into fixed income. When you look at the FDI rankings, India has actually done the best across all geographies in terms of FDI flow.
So if people vote with their wallet then that is a vote of confidence, in some sense, for the macroeconomic stability we have and our potential for growth.
I think certainly there is a positive sort of thought process with all kinds of investors, not just the FIIs. But more importantly, I think the FDI kind of investor believes that it will get easier to do business in India and this is a good time to go there.
The market has seen some sort of volatility after the sharp run post the elections......
Personally, I don't think the market is volatile. What's happened is that we've become more sensitized to global events. Everybody has got television beaming into their houses and offices and cell phones. Anything that happens is immediately broadcasted.
Around 20 years ago, a normal trading calendar year in India would have a market range of 30%. We haven't seen that in many years. In fact, over the last four years the market has actually not been particularly volatile at all. I think it's just that our thought processes have become a lot more volatile than the market itself.
What would need to happen to see the market taking the next quantum leap?
In terms of what could change from here, we have to step a bit away from that and look at how can we make growth sustainable. Then we are back to the same old standard solutions - fiscal stimulus and monetary stimulus.
India's problem, as we've seen over various growth cycles in the last 20 years, is that there are either too many structural rigidities or too many supply-side bottlenecks and I think the challenge really lies in addressing these two areas. If we can address the supply-side bottlenecks, and invest in infrastructure and agriculture to support and make business competitive, growth will take care of it itself.
I see too many people thinking about growth in terms of “if government implements this policy, this is the EPS impact”. But we need to think about it in terms of the fact that if the government does this policy, it makes business more competitive, eventually that will convert into earnings and earnings is always an outcome, but it's an outcome of what you do for the rigidities and the supply-side bottlenecks. Once that is done, you'll get earnings growth and that's the fuel for any bull market.
From a three to five-year perspective, what are some of the sectors that you believe have promise?
There are two aspects to this.
I think the economy has gone through a fair deal of pain. We do recognise that at some point the cycle is likely to gather a little bit more upward momentum. It's still in the very early days of a recovery. But at this point of time we think there is a lot more value in just backing the right companies rather than obsessing too much with the sectors.
I think the outcomes in terms of companies who come out of this difficult period are prepared to get the best in terms of outcomes of growth and capital returns over the next few years maybe very, very divergent. So, really in that sense our thought process at this point of time is really more in terms of getting the stock selection right rather than obsessing too much about the sector.
The way we put it is that the last man standing is the first man forward and that's where we want to be positioned with those companies that we think can get a disproportionate benefit as and when the sector improves. So, that's one part of our thought process on that.
The second part is that corporate profitability as a whole is sort of depressed; the reason being that some of the cyclical sectors of the economy haven't really done very well, they are struggling. So, we do recognize the case for those cyclical areas to see slightly better profit growth going ahead and we'd like to position ourselves in some of those.
Our preferred areas at this point of time tend to be more in consumer discretionary and financials, not so much in the industrial space. But that's driven predominantly by valuations.
Your sector selection is an outcome of what parameters? You just said one of them is valuations....
If you were to just knock me twice on the head at any point of time and ask me the question which sector, I would say that's largely an outcome of two things.
One is always valuations and the second is the kind of cyclical and structural growth factors you see.
Always start with the valuations. Don't start with the narrative because the narrative can sound very good, but really what makes you phenomenal returns over a period of time is really the valuations that you're able to get into it.
Hence, when it comes to sector selection, we would really place a lot more emphasis on valuations, not necessarily at a stock level. At the stock level, it's more about getting the stock selection right and valuations then come second.
