Morningstar spoke with Anup Maheshwari, Executive Vice President of DSP BlackRock Investment Managers, who manages or co-manages funds such as DSP BlackRock Opportunities, DSP BlackRock Small and Mid Cap, DSP BlackRock Tax Saver and DSP BlackRock India T.I.G.E.R., to discuss the upcoming budget, stocks, earnings and the overall macro environment.
Here is the complete interview.
What are your expectations from the budget of 2012-13, from both the market and mutual fund industry's perspective? Any wish-list that you may want to highlight here?
From both the market and mutual fund industry's perspective, tax rationalisation, incentives for retail investors, and removal of MAT (minimum alternative tax) on special economic zones would be important.
Additionally, an impetus for kick starting the investment cycle as well as a fiscal consolidation roadmap will be keenly looked out for.
What are your expectations from the market this year? Are there any key concern areas in 2012?
We expect the market to trade in a fairly broad range this year. The present uptrend has been driven mainly by global liquidity flows and this trend could continue in the near future.
However, liquidity alone cannot support a long-term positive trend. We need to see higher corporate earnings and a lower interest rate environment for the market to perform in the long term.
We see this combination (higher earnings and lower interest rates) coming through gradually over the next few years.
But there are a number of risks the market will face along the way. Excessive printing of money globally, high oil prices, uncertain election outcomes, large deficits and currency volatility are some of the main risks that markets have to contend with.
We will need to be cautious if the short-term liquidity effect causes markets to move up too much too soon.
The market didn't do well last year. Did anything surprise you? What was your strategy?
Last year was a "trending" year, with the markets moving downwards every quarter. To that extent, portfolio positioning towards quality, defensive names yielded out performance.
It was also a year of considerable divergence in valuation between groups of stocks. As a result, our strategy of running lower than normal beta in our portfolios worked well.
This year has started out quite differently. We are seeing some convergence of valuation and interest rate sensitive sectors are performing better. Our portfolio beta has increased over the past few months as well.
Is it a good time to invest in equities or do you see some more profit booking at these levels? What is your take on your valuations presently? At what range do you see the markets more fairly valued?
Any time is a good time to invest into equities, provided you take a long-term view. The fact that the market has traded in a range for the past four years makes the case for future returns even stronger.
The market is reasonably priced at about 14x forward earnings. The market is typically undervalued when it is closer to 10x earnings and overvalued at 20x earnings. So, the market is priced right in the middle at this time. This is therefore a time when investors would need to be patient and take a long term--a three- to five-year--view.
Domestically, how will things shape up this year on the macro-economic and corporate earnings front? How do you see the government's fiscal situation affecting markets?
There have been a lot of macro headwinds over the past couple of years. The big issue that companies have had to grapple with has been the uncertain policy environment and a general slowdown in approvals by the government.
Going forward, we will have to keep a close eye on capital allocation by companies and whether their future investments will yield the same returns as seen in the past.
For now though, the situation appears to be easing. Interest rates are widely expected to trend lower and there seems to be some urgency in addressing hanging policy uncertainties. In our view, corporate earnings could grow by 13-14% in FY 2013.
The government has a big challenge on its hands to manage the fiscal deficit. High oil prices and rising subsidies are difficult to control. The government will have to look at higher tax collections and manage its books in a way that it does not compromise growth and crowd out investments.
The bounce-back in markets in 2012 seems to have been led by a liquidity rush, with FIIs pumping in about $7 billion so far this year. Do you expect this liquidity rush to continue here and also globally, for the rest of 2012? What impact can global factors have on this liquidity situation?
We could continue to see FII inflows in the near term, as monetary easing continues globally. But, as mentioned earlier, liquidity is a temporary driver of markets. It is critical that this liquidity finds its way into the real economy and we see some up-tick in global growth for the market rally to sustain.
Just when it seemed that the RBI would start cutting key policy rates, rising crude prices appear to be playing spoilsport, as it threatens to push inflation up. Do you think this will force RBI to alter its monetary policy stance?
The RBI has articulated that its focus has shifted from inflation to deteriorating growth. We believe that the RBI will start cutting policy rates shortly, as there is a window over the next few months wherein inflation is expected to be subdued.
A further rise in crude prices, however, will reduce the room for the RBI to maneuver its interest rate policy. So we do expect interest rates to head lower, but the extent of fall depends on the trend of inflation.
The infrastructure theme has underperformed considerably over the last few years, but has seen a strong rally so far this year on expectations of softening of interest rates. How do you see the performance within this space in the current calendar year? Accordingly, what will be the investment strategy with your DSP BlackRock T.I.G.E.R fund?
The infrastructure sector has been underperforming over the last few years due to a poor investment climate. This has been the result of a rising interest rate environment and lack of policy reforms related to land acquisition, mining, and other environmental issues. These issues are now getting addressed. The interest rate cycle has peaked for now.
Further, the PMO (Prime Minister's Office) directives should help resolve issues related to coal, power and road infrastructure going forward. Additionally, the valuations in the sector are attractive and any positive announcements from the Budget will enhance sentiment further.
In our portfolio, we have added companies in the financial, engineering, construction and capital goods sectors. We would advise investors with a three- to five-year horizon to consider investing in this sector.
On the flip side, defensives stood out in 2011. Do you expect the trend to continue in 2012? We also saw financial stocks underperforming last year, on concerns of higher interest rates and deteriorating asset quality. What is your take on this sector this year, considering that you are overweight within this space in most of the funds that you manage?
Although the pharmaceuticals and consumer staples sectors outperformed in 2011, for the first half of 2012 we expect interest rate sensitive and cyclical sectors to outperform due to RBI's focus on growth and the expectation of monetary easing.
Additionally, companies in the financial sector are better positioned as concerns over deteriorating asset quality have dissipated and a decline in policy rates is imminent. Credit growth, however, will need to be observed closely. Currently, in our portfolio, we are adding a mix of public and private sector banks.
