By ECONOMICTIMES.COM | 6 Apr, 2013, 08.14PM IST |
In an interview with ET Now, Harshad Patwardhan, ED & Head-Equities, JPMorgan AMC, talks about the Indian market and why it should the preferred choice for investors over bank FDs, gold and real estate. Excerpts:
ET Now: When we started 2013, Indian markets were trading at the top of the heap, but now we are trading at the bottom and are no longer a good house which is part of a dirty neighbourhood. What is your take?
Harshad Patwardhan: Things have certainly changed. Compared to January, things have changed and the primary reason for that is political developments that happened about a month ago. The market is down only about 3% and it is surprising because $10 billion of net FII inflow has come in but there has been a lot of selling that has happened from domestic institutions because of redemptions. Therefore, we are a bit more cautious.
ET Now: We are completely dependent on global liquidity. When foreigners buy, we go up and when they sell, we go down. Of late, foreigners have been buying but we are still going down. Why is this happening?
Harshad Patwardhan: That tends to happen. Market moves are more muted compared to what is happening at a stock level. During the first quarter of this calendar, Nifty was down about 3.8%. However, the dispersion in stock returns is phenomenal. Therefore, the best stock was up about 28% in the three months in Nifty and the worst stock was down 37%. We are not buying the market but we are buying individual stocks. Even in this challenging environment, we have to find ways to make money in a relative term for our investors.
ET Now: Are you a bit surprised and worried about the polarised nature of this market?
Harshad Patwardhan: The dispersion has been happening for a while. It is not a quarter phenomenon. As equity fund managers, we focus on the stocks that have not turned well and whether value is emerging on those. Our portfolio is not just hiding in defensives but we selectively also look at stocks where value may be emerging after a long streak of underperformance.
ET Now: You own some quality stocks, consumer names and private banks. Are you happy to pay quality premium?
Harshad Patwardhan: That premium in certain cases is justified because even in a tough environment, some of these businesses will continue to do well. Therefore, if a business can deliver somewhere between 18-22% earnings growth, it deserves that premium. However, we are also conscious that if that continues for a longer time and if earnings growth disappoints, the valuations relative to earnings may look very expensive.
We are conscious of that and therefore our portfolio is a mix of some of those stocks which are high quality, high growth and which can grow in the current environment. A the same time we also have some of the stocks which have underperformed but it may be changing at the margin.
ET Now: A year ago as a fund house you were hiding in quality stocks/defensive stocks, but of late you are selling them and you are also adding some industrials and some rate sensitivities. What is in the price?
Harshad Patwardhan: Instead of the market, certain stocks are clearly pricing in that doomsday scenario will continue for another 2-3 years. Therefore, we have to allocate the limited resources. Sometimes it does make sense to take some money off the table from the quality stocks and growth stocks that have done extremely well.
However, based on valuations, they do not offer those returns going forward and allocate that money to stocks which are good quality. We do not compromise too much on good quality stocks. Therefore, we have allocated from those defensives to some of the industrial rate sensitivities. This is because ultimately what our investors are looking for are returns and if the expected returns are high, we do not mind reallocating the capital.
ET Now: Large cap equity oriented schemes are underperforming their benchmark indices. Why is that happening?
Harshad Patwardhan: Inherently, equity is a long-term asset class and it is understandable why people are not happy about equity because for the last 5 years nothing much has happened. If we look at next one year, there are many uncertainties – domestic as well as international. However, people tend to forget that as an asset class equities have delivered very good returns. For example, 24 out of 33 years equities have delivered positive returns.
On a compounding basis, equities has delivered 16% returns over the last 33 years. That is something that needs to be reminded to investors and potential investors because the recent experience of people on equities is not good. These are uncertain times and if we make an entry now, we might get rewarded by the market.
ET Now: Do you think a genuine Indian retail investor will come back to equities when gold, real estate or fixed deposits start doing badly?
Harshad Patwardhan: Yes, that is unfortunately true. For the past 5 years, equity markets have not delivered good returns but this is one asset class that can help us protect and grow our purchasing power. Therefore, if we look at the last 33 years and compare equity as an asset class versus one year bank fixed deposit – the difference in returns is phenomenal, especially if we adjust the inflation.
If you adjust for inflation, equities have delivered 9% real returns over 33 years. In the same period, one year bank deposit has delivered barely 1-1.5% returns. That is the difference in real returns that this asset class can give. Unfortunately, investors will flock to an asset class which has done well in recent times.
ET Now: Markets are looking slightly shaky as growth has come down and CAD has gone up. Do you think that for markets to have a durable rally, macros have to improve first?
Harshad Patwardhan: Macros have to improve first. However, the macro numbers that we are seeing now in terms of growth and CAD is a result of what happened over the past 2-3 years. The more important thing for markets is to focus on sequentially how things are going to move. The CAD number was worse than even the most pessimistic expectation but it should be noted that CAD this quarter is likely to be better.
In terms of growth, most people expect the GDP growth to accelerate to about 6 per cent. Therefore, sequentially things may be moving for the better. It is not something that we should celebrate but we should note that on some of the key macro variables, things are changing for the better. In terms of interest rates, we can debate as to whether there will be a pause or not. Over the next one year, we may see policy rates 50-75 bps lower than where they are now.
ET Now: Do you think we should stop making song and dance of monetary action?
Harshad Patwardhan: I agree with you. Though rates have come down, some projects are not going to take off immediately. For that to happen, more action is required on other fronts. After almost 24 months of inaction, we have seen some action and we tend to forget how drastic some of the government measures were like diesel price decontrol. We have seen three or four instances of prices going up. That is very good from a long term macro perspective.
Railway passenger fare hike has happened after almost a decade. Moreover, the government is pusing ahead with the direct cash transfer scheme. Therefore, the government has been taking some actions over the last six months. It will take time for that to translate into corporate confidence picking up. Rates are going down but that is not a sure way of revival in corporate capex.
ET Now: Due to high inflation, car sales have slowed down and retail footfalls have fallen. Jubilant Foodworks has indicated that they are struggling to sell more pizzas. How are you approaching consumer stocks?
Harshad Patwardhan: For most of last year, we did not see a problem on the consumer front but it had to come at some stage. At present, we have seen a slowdown from discretionaries to non-discretionaries. Therefore, we have to be very careful because the valuations are not very comforting.
ET Now: But discretionary is not that expensive?
Harshad Patwardhan: Some discretionaries such as jewellery companies are not mouth watering right now considering the valuations. Therefore, it is important to do strike a balance. We tend to look at individual stock prices not a market as a whole and it has priced in the slowdown in demand.
At times, we do not hesitate taking some money off the table from that segment and look for a segment where there is no still visibility but the stocks are pricing in a challenging time period for another 2-3 years. Our belief is that sooner than 2-3 years, a revival will start. Therefore, we do not mind allocating money from there to here.
ET Now: Do you think large cap IT seems a crowded trade now as almost everyone on the street is of the view that US economy has revived and it will benefit IT stocks?
Harshad Patwardhan: It is certainly becoming a consensus view. The analysts are saying that 2013 will be better than 2012. The real question is whether this demand revival will be sustainable. If the demand revival is sustainable on the IT spend, I am not sure whether that trade is over in terms of IT stocks doing well.
ET Now: Are you still are a big fan of large cap IT stocks?
Harshad Patwardhan: We are overweight on the segment but we are internally trying to form a view as to whether this demand upturn is sustainable or it is a one year phenomenon.
ET Now: Are you tempted to go down the ladder when it comes to IT space? Are you looking outside those three-four names?
Harshad Patwardhan: We have a smaller companies fund which is a midcap fund. Therefore, we have some stocks which are from the tier II and tier III names. We also have exposure to both tier I IT companies and smaller ones.
ET Now: One space which has got absolutely smashed is the entire metal space. Is it time to start nibbling at metals now?
Harshad Patwardhan: Among metal stocks, the kind of conviction we can build is lower than that in some of the others. This is because there are too many variables. Therefore, it may not be prudent to be completely absent in that category.
ET Now: Among China, Japan and US, which economy will surprise us on the upside and which economy could disappoint us on the downside? What could be the implications of the current global set up?
Harshad Patwardhan: We are reasonably positive on the prospects of Japan and US and perhaps lesser on China.
ET Now: Do you think currencies will have a very strong role to play for next 12-18 months?
Harshad Patwardhan: Currency is something we have to watch because of our current account deficit. That is one area of vulnerability as far as India is concerned and we are monitoring it very closely.
ET Now: In the near term, are you thinking of aligning more with exporters because if macros role revive, the rupee will remain under pressure and if rupee remains under pressure, IT along with textile exporters and auto companies will also benefit?
Harshad Patwardhan: Yes, some of them will. We have a section of the portfolio designed exactly as per the kind of scenario that you painted.
ET Now: We can endlessly argue whether the PSU banks are good or bad, but the bottom line is – they are cheap. Are you a big fan of the PSU banking space? Do you think there is a trade there?
Harshad Patwardhan: I am not a big fan of PSU banking space but there are times when it makes sense to get into them. Therefore, we have some position in those banks. This is because the argument is that valuations are too cheap and if and when the revival starts in the economy and the NPL cycle peaks and trends down, these stocks could do well. We own that space primarily to protect ourselves against that scenario.
ET Now: What about the bad part of the market – companies which have bad balance sheet, asset owners where balance sheet quality is a question mark. Do you think it will be a while before that space will revive?
Harshad Patwardhan: For the past six months, we are very closely looking at that space. We are looking at the better quality companies there with better promoters. However, the cycle has been so severe that even some of the good names have suffered. We believe that at some stage there will be a time to buy these stocks. ET Now: Everyone is excited about policy reforms but the policy stocks such as HPCL, Reliance, ONGC and other infra names have run precious little. Is it not quite ironical?
Harshad Patwardhan: Yes, but there have been so many false starts in the past. If we talk about the oil & gas sector, there have been many false starts. Therefore, investors want more evidence before they believe that it is indeed going to stay.
ET Now: When will the new bull market start or has it already started but we are not able to recognise it?
Harshad Patwardhan: It is very hard to say but let us try to analyse it using some numbers. For at least five years, EPS growth for Sensex was barely about 7% compounded and the CAGR for past 20 years is about 14%.
Therefore, for past five years, corporate India has been growing at a much slower rate than the average. If we look at the estimates for the next two years, they range somewhere between low-teen to mid-teen numbers. Therefore, most of those negatives are already priced in. However, those numbers may not be revised downwards as the bulk of the downward revision has already happened.
ET Now: Do you think markets are likely to move in line with earnings growth now?
Harshad Patwardhan: That is a fair assumption. After the election results are out and if we have a favourable outcome, there could be a potential for re-rating. We can’t draw any conclusion from the calendar year returns when elections were held. Therefore, it will depend on what happens. We should expect a mid-teen number right now and that is also in line with the long term returns of 16% over last 33 years.
ET Now: What is your big investment idea going forward?
Harshad Patwardhan: There are many positives as sequentially, things are looking up. There is a section of the market which is extremely cheap in pricing. Therefore, we are focussing on those companies and trying to figure out whether this is the right time to buy. Our portfolio is fairly balanced and has companies that will do well even if the macro situation does not improve in the near term. We also have some companies which are geared to that improvement but we are closely monitoring and researching companies.
ET Now: Are fairly convinced that in the next 6-12 months, Indian markets may not do anything special?
Harshad Patwardhan: It is very hard to predict that. I don’t know when the elections are going to be held but if the opinion polls start coming out and if the outcome is something that suddenly seems attractive to people, markets will not wait for things to happen. It may start getting priced in. Therefore, one big lesson from last year is that negative news flow does not necessarily mean markets will go down.
ET Now: Among global liquidity, local macros, earnings and politics, which factor will have the highest influence on markets for the next 12 months?
Harshad Patwardhan: All of the factors because it is an interplay of various things.
ET Now: What would you like to prioritise?
Harshad Patwardhan: Global liquidity is important because we are vulnerable right now on a CAD front. It did not happen at the same rate as last year. Politics – a reasonably palatable outcome is important for and revival of corporate capex and sustainability of earnings growth.
ET Now: Are you bearish, bullish or cautiously bullish?
Harshad Patwardhan: Cautiously bullish is probably the right description.
Source : http://goo.gl/0zILN