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MF News ‘Indian markets might no longer provide linear investment opportunities, expect dispersion in earnings profile’

‘Indian markets might no longer provide linear investment opportunities, expect dispersion in earnings profile’

Ritesh Jain, CIO, BNP Paribas MF believes that growth opportunities are not evenly distributed across the market but are available in select sectors.
Nishant Patnaik Oct 6, 2017

Since you have recently joined BNP Paribas MF, what changes have you made to the fund management philosophy of the fund house?

Anand Shah, Deputy CEO and Head of Investments, has clearly laid out the fund management philosophy of the fund house. I do not think there is a need to change this well-defined philosophy.

I have been a top down guy throughout my life i.e. I first look at sectors before choosing individual companies to invest. I have a conviction that my fund managers know about their companies better than I do. However, I understand the sectors very well.

Also, I believe that risk management is the key to delivering consistent returns. I look at risk more deeply by looking at macro variables.

We discuss about the opportunities in the markets and impact of a particular move on a sector. For instance, demonetization and GST, normally, would not lead to changes in the market. But such events create market opportunities.

Most people invest by looking at what has happened in the past; however, I look at future capital flows to identify the winner. Simply put, I look at which part of economy is getting more money. That is where the discussion happens on what will do well and what will not.

What are the learnings you imbibed from fixed income that has helped you manage equity funds?

These are completely different markets. But fixed income can give you the first sign of trouble in equity markets. For instance, abroad, credit default swaps being a developed market is faster at identifying the risk. Since it is not that developed in India we need to look at the equity, the second proxy, to identify bond risk. Unfortunately credit rating agencies are never able to identify risk in time and hence it becomes important to have cross functional experience. Equity fund managers also look at their companies more deeply than the fixed income fund managers do. There is much more data on the equity side compared to fixed income. At times, we seek equity fund manager’s views to understand more about the companies in our fixed income portfolio.

For fixed income, only the macro matters. But in equities, the fund managers have to keep a tab on both - macros and micros.

What is your outlook for equity and debt market for the next two years?

In my view, the sand is constantly shifting. Indian markets might no longer provide linear investment opportunities. We expect dispersion in the earnings profile.

However, we believe there are opportunities in select pockets.

Let me cite a few examples.

To start with, government spending has not been happening for the past three years. The government’s primary objective today is to create jobs. Hence, government companies are likely to get capital to open up new capacities and create jobs. PSUs are likely to benefit from this move.

Similarly, consumption sector is expected to get a boost due to the farm loan waiver. Although the farm loan waiver is at the cost of the future, it is positive for equity markets. Free money will push spending among people. As a result, consumption and demand will go up. In addition, implementation of the seventh pay commission will further give the FMCG sector a fillip.

Another factor that will have a positive impact on India's growth story is the shutting down of capacities in China. Chinese government wants to make Beijing a smoke free city. It has closed factories engaged in manufacturing activities. This has given pricing power to Indian manufacturers.

In my view, fundamentals will follow soon but what currently matters to the equity market is capital flows.

Also, liquidity in the market will continue to exist as deposits in gold and real estate are not giving attractive returns. Currently, we are in a sweet spot.

On the fixed income side, investors could consider to remain at the short end of the curve. Our reading is that inflation will go up by 5% by March 2018 due to increase in prices of capital goods, fuel and pulses.

Another factor is the increase in supply of paper by the government due to populist measures such as farm loan waivers. And when supply exceeds demand, interest rates increase.

We have been hearing from fund managers that corporate earning is round the corner for the last three years. Why has it not revived so far? When do you expect revival in the corporate earnings?

We believe that the absence of corporate earnings is due to a decline in GDP growth and no capital expenditure from government. GDP for Q1 FY18 is at 5.7 percent (source: Central Statistics Office). Also, there is no pricing power with corporates. On top of that demonetisation and implementation of GST seem to have affected corporate earnings growth.

Government capex is yet to happen. However, government is expected to start investing to create jobs. Implementation of populists moves like the seventh pay commission and farm loan waiver and Chinese cutting down on capacities is likely to give a boost to earnings.

In my view, corporate earnings may start recovering by the next quarter end. If that gets delayed, then there could be a risk to the market rally.

Your fund house has come out with a focused fund. What is the rationale behind this fund?

If you look at the report card of equity funds, the concentrated portfolios have started delivering better returns than their diversified counterparts.

In a diversified portfolio, you have to have everything. Even if you are underweight on a few sectors you need to diversify for the sake of diversification. On the other hand, in a concentrated portfolio I can have leaders.

Currently, the growth is not evenly distributed in the market. It is in select pockets. We are bullish on financialisation (move from physical to financial savings), formalization (move from unorganized to organised (due to implementation of GST), farm income (doubling of farm income by 2022) and fiscal spending (government to lead expenditure).

You are an avid reader and share a lot of good literature with people. Why do you think that fund managers should spend time on reading?

Reading helps me manage people’s money better.

Wisdom comes from reading. It allows me to get a holistic view of the markets. I believe I need to know more than I know today. Knowledge matters most in our business.

I am open to reading all kinds of literature, be it finance or something else, to widen my knowledge base. I invest at least 5 to 7 hours a day in reading.

 

2 Comments
Hakimmuddin · 1 week ago
Nice article and is very useful to us
S.RAMALINGAM · 1 week ago
An excellent article with candid and precise views on the current market scenario . His quest for looking out for the areas / sectors where future money will flow and spotting out the winners is praiseworthy.
His views that Risk management is a key element in providing consistent returns is evident from the overall good performances of funds of BNP Paribas AMC all these years.
Its heartening to note that he is a voracious reader despite his busy schedule and it is worth emulating for Advisors like me .
Hats off to CafeMutual for bring out such wonderful Interviews
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