Ravi Gopalakrishnan, Head – Equties, Canara Robeco Mutual Fund talks
to Cafemutual about his fund management strategy, the current state of the
economy and more.
Is the current euphoria in the market justified? Can the market
sustain these levels? What are the key risks in the market currently?
Yes, we believe that the excitement in the equity markets is well justified. The Indian economy is currently having a twin engine support, an economy that has bottomed out in FY14 and a decisive election mandate by the electorate in favor of reforms and economic growth. In addition, the headwinds of past 2-3 years (high inflation, current account deficit, fiscal deficit, balance of payment, etc.) are on the receding trajectory and this provides a ground for potential monetary easing by the RBI. The equity markets ideally thrive in this expected mix of improving economy and monetary easing as the earnings growth and high valuations will follow going ahead.
Given the scenario, we think India is all set for a ‘secular macro economic recovery’ over the next three-five years. We expect India to achieve a target of 8.5 percent gross domestic product (GDP) growth, and equity markets will reflect that growth.
Even if we see the valuations, our markets are currently trading at around 16 times one-year forward earnings and are just trading above the historical average. During bull markets we have seen price earnings (PE) of markets peaking at nearly 22-23. Once we see growth touching 8+ percent in the next few years, we might see PEs expanding that will have a positive impact in terms of market valuations.
Do you foresee any imminent correction in the market? What strategies have you put in place to overcome
such risks?
Equity markets generally are
volatile given the fact that all markets are integrated one way or another.
World markets are influenced by macro and micro fundamentals and also global
risk appetite. The equity markets in India have seen a good rally over the past
few months on the back of expectation of recovery in the macro-economic
situation. Currently, there is a fear that global growth may slow down
resulting in risk aversion towards equities and in particular emerging market
equities which have given very good returns this year. With the US dollar
strengthening against most currencies including the INR, one can expect some
reversal of flows from Indian markets as well. However, unlike last year when
India’s macro and currency situation was very fragile, this time around the
situation is far better, be it inflation, fiscal deficit, forex reserves or
growth expectations. This puts India in a far better position relative to other
emerging markets. In the event of a correction in global markets, Indian
markets could also react, however, we believe the extent of the correction will
be far less than other markets given our improving fundamentals.
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?
We have been cautious about
the power and metals sector since some time given the uncertainty surrounding
the policies with respect to availability and pricing of coal. We have been
very selective in terms of our exposure and hence have been under-weight the
sector. Hence the impact on our portfolio as a result of the court ruling has
been limited.
What is your reading about the current state of the Indian economy? What global cues are you looking out for?
The macro situation in India has seen a steady improvement since the beginning of the year. There has been a steady improvement in the fiscal and trade deficit situation. Inflation has been steadily coming down, thanks to some positive steps including calibrated diesel price increases initiated by the previous government and also the aggressive steps taken by the current government to reign in food inflation. Further, falling oil and commodity prices globally is expected to augur well for the country’s fiscal situation and also improve performance of corporate India. The PM’s successful meetings with Japan, China and US are big positives in the direction of attracting foreign investments. The recent announcement by Standard and Poor raising the outlook for India to "stable" from "negative," also bodes well for attracting foreign inflows and reduces India’s vulnerability to external shocks.
From a global perspective, the slowdown in Europe and the measures taken by the various central banks around the world will determine the flow of capital going forward. Further, the direction of the US interest rates along with the views of the Federal Reserves on tapering will influence financial markets in the near term.
Most of your equity funds except Canara Robeco Infrastructure Fund have consistently outperformed their benchmarks. What helped these funds?
It is our bottom-up stock
selection approach and identifying good quality companies which have helped us
outperform the benchmarks consistently over the long term across all our
schemes including Canara Robeco Infrastructure Fund. We believe that company
fundamentals are the primary determinants of stock performance. The ‘growth’
oriented style of investing combined with a ‘value’ approach creates a well
diversified portfolio of fundamentally strong companies. This stock-picking
strategy is also known as ‘GARP’ investing: Growth at a Reasonable Price.
Except Canara
Robeco Emerging Equities Fund, your stock picking strategy for rest of the
funds indicates that you invest in blend of large cap growth as well as value
stocks. What is the reason behind following such strategy?
We follow a consistent
investment philosophy across all our funds. The portfolio construction process
is based on the investment objective of the fund and every investment decision
is made based on the investment mandate of the scheme. We follow a bottom-up
approach to stock selection with a top-down overlay.
Currently, many fund managers are increasing bet on infrastructure sector. What is your view on this sector?
The Indian economy has been amongst the fastest growing economies in the world. However, one critical requirement for momentum in the growth to continue is sustained and accelerated development of infrastructure. The need for stepping up the scale and scope of private investment in infrastructure has been emphasized by the Government of India. In line with this, the new government has been opening up sub-sectors of infrastructure for attracting private and foreign investment.
While thematic funds are high on the risk return matrix it has to go through a complete cycle in order to maximise returns. We think that the stage is set for the capex cycle to turn around which may benefit the infrastructure sector on the back of the following:
- · Pick up in reforms
- · Increased government spending
- · Lower interest rates next year
- ·
Low commodity prices
What are the
next triggers for the market?
There are several triggers which are likely to influence market movements going ahead. The trend in lower inflation resulting in expectations of lower interest rates by 1Q FY16 will help in kick starting the investment cycle. Sustainability of low oil prices and commodity prices may help in bringing down the deficit and also help performance of corporate India. Further, the introduction of GST on a time-bound manner should help in improving GDP growth over the next 3 to 5 years.
From a global perspective, the extent of the slowdown in Europe and the actions of various central banks around the world will result in heightened volatility across financial markets. In addition, timing of interest rate increases in the U.S. could also determine flows towards emerging markets.
