Anand Shah, Chief Investment
Officer (CIO), BNP Paribas Mutual Fund shares his perspective on markets,
current state of the economy and his fund management strategy with Cafemutual.
Is the current euphoria in the market
justified? Can the market sustain these levels? What are the key risks in the
market currently? Do you foresee any imminent correction in the market?
At 17x CY14 PE and 14x CY15 PE BSE Sensex, the Indian market appears to be fairly valued in the context of mid-teens earnings growth. Economic reforms can propel earnings in few sectors in the short term and evidence of fiscal consolidation and policy actions may finally encourage RBI to reduce policy rates, which can lead to a re-rating of the market over the medium term. Slowdown in policy actions and concerns over global liquidity are key risks to markets. We believe companies (businesses) create wealth and not markets.
What is your reading about the current state of the Indian economy? What global cues are you looking out for?
The recent sharp decline in commodity prices augurs well for India’s macro-economic situation and earnings. Prolonged lower prices in general can offset inflationary pressures in food and services segment of CPI. Also, lower crude oil prices is expected to result in a lower CAD and fiscal deficit; Also, this may provide some respite to the rupee against a potential tightening by the US Fed and ongoing US Dollar appreciation. RBI expects inflation, partly flattered by base effect, to ease to around 6% by November from 7.8% currently, before climbing back in first quarter of FY15. The policy statement reiterated upside risks to the 6% inflation forecast for January 2016. What is clear is that the RBI governor is unlikely to tinker with policy rates unless there is convincing evidence of a sustainable decline in inflation towards the official target.
The Supreme Court termed all coal mines allotted between 1993 and 2010 as illegal. Has your fund invested in power, coal and mining stocks? If yes, to what extent and what would be the impact on the performance?
In continuation with its judgment dated August 25, 2014, the Supreme Court (SC) has notified to de-allocate captive coal blocks allotment. The earlier judgment termed the process of allocation of coal block either through screening committee route or government dispensation route as arbitrary and illegal. The timeline for handing over the mines and completion of related modalities is till March 2015. Long-term gains that can be leveraged out of the coal block de-allocation move outweigh the short-term uncertainties. The stage is set for the government to initiate long awaited coal block auctions. The coal sector (and probably the mining sector) can benefit from increased competitiveness, trading mechanisms and global technology transfers if the government uses this opportunity to initiate reforms in the sector. Structural changes in resource allocation process may help in increasing transparency and attracting investors in the sector. We don’t have exposure to the companies affected by this ruling.
Post the elections and the recent market rally, retail investors’ interest in equity funds seems to have revived. Do you think the momentum will continue going ahead? What could derail it?
If the new government addresses the key issues of inflation and employment, it may lead to acceleration in growth in the medium to long term. Job creation in a country like India with favorable demographics will result in higher consumption that is often followed by higher investments which can ultimately lead to a virtuous growth cycle.
Fund managers are increasing bet on infrastructure sector. What is your view on this sector?
Among domestic cyclical sector, we are positive on the cement sector. We expect that acceleration in infra spend may lead to cement demand growth. Capacity utilization in the sector is low currently, which can provide operating leverage resulting in better earnings growth. Valuations are reasonable considering amount of free cash generated by these companies.
Have your shuffled your portfolios after the formation of new government? Which sectors do you think will play out well in the next three years? Which sectors are you bullish/bearish on at this point?
We are positive on private sector banks, telecom, cement and companies which are expected to benefit from low crude oil prices. Private sector banks having superior asset quality, CASA and adequate capital are best placed to benefit from the revival in growth. Telecom sector is expected to benefit from multifold growth in data usage, industry returning to rational pricing behavior. As discussed earlier cement sector is expected to benefit from an uptick in infrastructure spend. Falling commodity prices, especially crude oil is expected to benefit some companies in oil and gas sector.
Most of your equity funds have consistently outperformed their respective benchmarks. What helped these funds? Also, your stock picking strategy indicates that you invest in blend of growth as well as value stocks. What is the reason behind following such strategy?
We believe that, ‘it is companies that create wealth, not markets’. The companies are thoroughly researched internally by our experienced research team with an aim of ensuring that only the suitable companies make it to our portfolio. Our investment philosophy focusses on BMV (Business – Management – Valuations) framework for selection of companies. Various investment ideas are filtered through our BMV (Business – Management – Valuations) framework before adding it to investment universe. The business fundamentals are analyzed based on different parameters like secular trends, uniqueness of business model, moat of business etc. Management’s execution capability is key in delivering sustained returns by companies within the realm of industry dynamics. Good corporate governance is also an important criteria for us in selecting companies. Growth at Reasonable Price (GARP) is the philosophy that is followed while assessing valuations.
