Can you take us through your investment philosophy?
Our investment philosophy is tilted towards long term investing. We tend to follow a bottom up approach. We lay specific thrust on the corporate governance standards while selecting our investments. Clear sustainability, scalability & competitive advantages of businesses usually tend to deliver returns to our investors from these investments.
What is your outlook for equity and fixed income market for the next two years? What kind of returns should investors expect from both the markets?
On the fixed income market, we are still in the accommodative stand and we expect one repo rate cut before March 2017. Further easing will depend on how the inflation shapes up going ahead. Also, there are concerns on the crude oil prices and FII flows impact due to rate hike in USA. So, we see FII flow may be diverted to US from other emerging markets. In light of the above factors, debt investors should reduce their returns expectations.
On equity market, we are quite optimistic for the medium term. The phenomenal growth of the past decade led to cyclical pressures in terms of higher inflation, deterioration in external balances, stretched balance sheets both in the corporate and banking sector etc. and more importantly brought to the fore the structural changes required to be made by the Indian economy to grow for the next decade and beyond. India has made steady progress towards addressing these challenges since the past few years. The correction in international commodity prices provides additional headroom for the country to grow and correct its imbalances. The banking sector which is coming out from stressed asset cycles should provide a fillip to earnings. We are expecting earnings to grow by 12-14% in FY17 & even more in FY18. Equity markets should provide returns in tandem with earnings.
Do you think the momentum in the market will continue going ahead? What could derail it?
It is difficult to predict whether the momentum will continue or not; however there are positive changes happening in India and in the overall ecosystem which should result in earnings growth and hence investment returns over a period of time. Sudden changes in macro variables like global interest rates, forex equations or political uncertainties may derail it.
On the macro front, GDP has grown but we are yet to see earnings picking up. What could be the reasons for the same?
Typically, corporates and individuals tend to react to changes in a staggered manner. Banks are yet to come out of stressed assets problem post which they will start dishing out loans to fund capital projects. I believe earnings pickup is around the corner and should be visible in a few quarters.
Which sectors do you think will play out well in the next three to five years?
In the last few months we have seen increased risk taking in certain pockets, risk aversion has reduced drastically which implies we need to be extra cautious while investing. We believe select opportunities are present in PSU banking, IT space as well as in the infrastructure space. Modi government is altering regulation trajectory of the country at a pretty fast pace which may bring additional opportunities to the fore. Good monsoon is expected to drive consumption growth in forthcoming quarters.
The regulator is said to have working with rating agencies to reduce risks in mutual funds. What do you think on the scope of reducing risks in mutual funds?
Post the downgrade of Amtek Auto Ltd and the subsequent redemption crisis, fund houses and SEBI have become more vigilant when it comes to investments in corporate debt. First, in order to make fund houses more accountable, the regulator has asked AMCs to develop internal credit appraisal systems. Further, the market watchdog has warned AMCs to avoid taking undue credit risks by investing in debt papers of companies that are saddled with loans.
In addition to this, SEBI has also come up with draft rules in which it has asked rating agencies to spell out how rating is conducted, responsibilities of analysts, and evaluate the performance of their respective rating committees - particularly if there's an unforeseen default. The rating agencies will also have to mandatorily provide three year rating history of the borrower, coupon and maturity of a paper.
SEBI also wants rating agencies to give early warnings to investors and give clear reasons for suspension of ratings. In short, SEBI is on the right path when it comes to putting risk mitigation measures in place. It is now up to the rating agencies and fund houses to execute the plan and become more responsible. The steps taken by SEBI will help reduce risks in mutual funds as this will enable them to think ahead of the curve and reduce/offload exposure in riskier credits.
In your career as a fund manager, what have been your greatest learnings?
Remaining humble and being open to new ideas is the greatest learning in investing. Markets are ever evolving. We continuously deal with new set of market participants (now not only humans but also algorithms) and we have to be open to changes happening in ecosystem. As a fund manager, markets taught me to keep evolving myself, to understand my own nature which was a very humbling experience.
