AMC Speak 13th August 2014
Our markets will be resilient to global worries
Sailesh Bhan, Deputy CIO - Equities, Reliance
 

imgbd

Reliance MF has launched the second edition of its Capital Builder series amidst global concerns stemming from geo-political tensions to global gurus sounding notes of caution on US markets. Sailesh believes that these global concerns can at best cause temporary hiccups in India's recovery story, which is on a far firmer footing today than a year ago. Read on as Sailesh takes us through his market perspectives and how he proposes to construct the portfolio of this new fund.

WF : Global markets have turned jittery on account of geo-political tensions in Middle East. There anyway was some concern building up on equity and bond valuations in the US. US Fed's QE is set to wind up shortly, after a calibrated tapering down over several months. Mr. Greenspan has warned about a sharp correction and now Mr. Raghuram Rajan has also sounded a note of caution on global markets. How serious are global concerns and to what extent do you see them impacting our markets?

Sailesh : We have witnessed that despite the a few geo political events in Middle East, Ukraine or concerns over a possible rate hike in US etc markets have been fairly resistant. While the RBI Governor had mentioned his concerns on loose monetary policies adopted by developed nations which boosted asset prices instead of real activity, the Governor clarified that given its strong macroeconomic fundamentals India should withstand any kind of volatility.

Thus while global uncertainty in Middle East & Ukraine, tapering etc may create temporary hiccups in our market, we feel that our economic health is looking a lot better than a year back based on various parameters like deficit numbers (fiscal & current), GDP growth rate, foreign exchange reserves, IIP. We believe the long term growth story of the Indian economy is very strong & from a 3-year perspective markets are fairly valued to create long term wealth.

imgbd

WF : There is widespread expectation on earnings momentum picking up. In which sectors are you seeing signs of this already happening? In which sectors do you see analysts upgrading earnings estimates the most?

Sailesh : Historically, there has been a high correlation between company earnings, GDP and IIP growth. With GDP growth expected to pick up to ~6 - 7% levels in the next 3 years, we expect around 16 -17 % p.a. S&P BSE Sensex earnings growth. This represents a significant turnaround from the 8% CAGR earnings growth witnessed during 2008 to 2014. Domestic economy linked sectors like Engineering, Auto, Banking and some emerging areas like Internet, Media etc can witness upgrade in earnings estimates.

imgbd

WF : What makes you optimistic about urban recovery as a theme? What specific sectors do you see benefiting from urban recovery?

Sailesh : Urban consumption was significantly impacted by the subdued growth environment witnessed over the last few years. However in line with the improving growth scenario the Urban consumption is coming back on track with promising signals in various sectors like auto and retail. For example major auto makers have seen an improvement in car sales volumes in the last couple of months with urban contribution being the highest in last few years. . Urbanization is a fast evolving area with multiple offshoots whether in the form of internet, media & entertainment, travel & hospitality etc. All these themes are likely to benefit from the impending urban recovery.

WF : Which are the emerging themes that you see gaining prominence in this bull market and what are the key drivers for these themes?

Sailesh : Various key areas in the economy are showing visible signs of a recovery. As mentioned above, urban consumption is recovering. June IIP number was the highest in the last 6 quarters reflecting a likely turnaround in the economic activity which can gather pace over a period of time. Recent Government proposals have brought areas like defence & railways in the limelight. The FDI cap was recently raised to 100% in Railways & 49% in defence. Substantial capital expenditure is expected in these sectors in the next few years i.e., ~INR 90kcrs in FY15E for armed forces; ~INR 65,000 crs in FY15 in railways. Some of the emerging or nascent themes (wrt India) with a high growth potential include defence, railways, internet, media, hospitality, travel & hospitality etc.

WF : How will the portfolio of your Capital Builder - Series B be structured in terms of number of stocks, market cap bias and theme bias?

Sailesh : The fund will invest in companies across market cap with bias towards midcaps. The portfolio will be a focused portfolio with approximately 25 to 30 stocks. The fund will look to invest in companies with high growth potential. While the fund doesn't have any theme bias, the focus would be on identifying companies with high growth potential and likely beneficiaries of the economic recovery - urban recovery & industrial revival, emerging themes like defence, railways, media, internet & e-commerce, travel & hospitality. The fund may also have some allocation companies with high capability available at reasonable valuations.

WF : What do you see as the key risks of investing now into closed ended equity funds?

Sailesh : In current market environment close ended funds may be may be blessing in disguise for investors especially given the view the market rally may unravel over the medium term. Close-Ended funds promote disciplined investing and investors will not get swayed by near term swings.

Equity markets are seeing a recovery after a prolonged period of sluggishness. Macro numbers are displaying the first stages of a revival & to capture the full cycle a longer period of investment is recommended. We believe that investing for a 3 year period in the current stage of economic revival is appropriate.

Also, the fund being a 3-year close-ended product doesn't necessarily mean the portfolio will be static for 3 years. The fund manager will continuously monitor the portfolio & book profits as & when desirable based on market conditions. The fund will try to address the liquidity concern by endeavoring to book profits in sectors which have peaked & move to other areas of the market offering relatively better investment opportunity. The profits booked may also be paid out as dividends subject to availability of distributable surplus.

WF : You had launched some close-ended equity funds in the past few months. How are the previous close-ended equity funds performing?

Sailesh : In the last 9 months, we have launched 3 close-ended equity funds. All the funds are comfortably beating their benchmarks by 5 to 10% since inception. Our consistent investment approach across all the close-ended equity funds has been to identify & invest in good quality companies with a operating history available at reasonable valuations worked for us. These companies with sustainable business model, operating leverage are likely to benefit from PE improvement & EPS growth over a period of time.



Share this article