Ved Prakash Chaturvedi of Tata Mutual Fund says, by and large now their view is that over the next one year, midcaps may outperform because if one looks at the valuations of some of the high quality midcaps they have come down to corresponding Index level of 7000 or 7500 or maybe even lower.
Excerpts from CNBC-TV18's exclusive interview with Ved Prakash Chaturvedi:
How are you feeling about the market now? We have come a long way but we seem to be pausing for the last few days?
At the moment the market is waiting for a direction in terms of what the Fed will do tomorrow. Our sense remains that in the short-term there are significant concerns in the market on the currency and region of interest rates. We see that Indian interest rates will themselves go up a bit from here and we have been saying that short-term concerns in the market are high and one needs to be careful.
But look a little beyond this three-six month period and there are several positives and we will discuss these as we go long and as this plays out, I think Indian equities and Indian markets would look to be attractive propositions.
You would say for the near-term though we are trading close to the higher end of the band?
I think the market is not discounting all the concerns that are there at this point of time including the geo-political concerns etc. In India interest rates have gone up from their 10-year benchmark from about 5 per cent to 8.25 per cent and a paradigm change like this needs to have its impact on equity pricing. The debt yield and the dividend yield relationship has inversed now. All these need to be factored in Indian equities.
But as I said earlier this is a near-term view based on the near-term outlook and news flow, on longer-term go beyond the next six or three months and one will see a lot of positives developing, including the fact that the interest rate cycle will start reversing not now but maybe in six months from now and in the one year definitely.
My own view is that especially if oil prices come down, the entire export story that India has, especially in the IT sector itself, would mean that the current account would be more in balance. Some analysts are claiming that a couple of years hence, we might again be current account surplus. I have seen those reports out in the markets.
Now that has significant positive conversion for the currency, in fact one rating agency has already upgraded currency to an investment grade and all these positives will play out over the next two-three years. At the moment there are concerns but when there is an economic boom and market gloom, it is a best time for entry.
How would you get a sentiment though at this point, because you are in a market with a new offering from a mutual fund perspective, the Capital Builder Product? What kind of response are you seeing because it is a good sense of how retail HNI are feeling at this point?
I have been pleasantly surprised and this gets indicated by the two large size IPOs recently, which have got a good response from the retail market, showing that the retail investor wants to get into good quality issues and we have talked about the three-year India story, which has been bought out. So we had a good retail response at the ground level in various parts of the country.
What are you doing or what are your fund managers doing from a fund management perspective in this kind of a market? Are they sitting on a large bit of cash, churning out of midcap because they are under performing. What's been the broad strategy?
Various funds would have individual strategies. By and large now our view is that over the next one year midcaps may outperform because if one looks at the valuations of some of the high quality midcaps they have come down to corresponding Index levels of 7000 or 7500 or maybe even lower.
Some of these are good companies they are growing and our sense is that this valuation differential will get corrected again going forward and over the next one year we would not be surprised if we see that the midcap segment in fact outperforms the largecap segment. The results, which have been recently declared, give us no reason to doubt the long-term growth story in many of these companies.
Is there any redemption pressure as such at all in the mutual fund industry including yours that you find around close to 11,000 levels have people been booking profits or anything like that?
I must say that the bright spot in this entire picture of May-June-July period when the market went into a bearish period has been the individual retail investor. I think there have been no serious redemptions; in fact many investors have taken the SIP-Systematic Investment Plan- as a medium of investment. In fact, the number of SIP's has jumped in this period significantly. We at Tata Mutual Fund have seen inflows into our domestic schemes as well as inflows into our offshore fund.
You spoke about some of the medium-term positives which might actually surface three-six months down the line, could you talk about what kind of a range you see the market till then and whether you see the markets breaking out once again by the end of this year?
It's a mug's game predicting Index levels but if you put a gun to my head I would say that maybe between 9,800 and 10,800 is what I would see the Index would trade at. If the September results are again very good and by that time if the Fed is talking about easing, which means that the liquidity argument will turn most favourable for equities and specially in markets where the growth is faster in the US market and if by then the Indian companies are still showing the growth, I guess that the people will start talking about forward valuation and they will not look at March '07 numbers, but they will look at March '08 numbers.
Based on various hypothesis March '08 Index currently is at 12-13 times forward and then everybody will say that it is not such a huge PE high multiple and maybe you will see 10-15 upside from there in the short-term. So that is when I think that the sentiment globally and in India, especially for equities return. We have seen good growth for September.
What worries you the most from hereon, what could turn things around and not play along with that hypothesis that most bullish analysts have right now, which is to give this market sometime till the end of the year for things will turnaround once again? What can derail that?
If the fundamental earnings growth story does not play out as expected and if company has failed to deliver on higher and higher basis, that would be a matter of concern because the valuations are not exactly cheap, unless the earning growth is delivered.
But at the moment, that seems not to be the thing that is getting talked about because everybody believes that the growth is there. When we meet companies at the ground level on an ongoing basis, if we meet 100 companies, out of 100 companies, 85 are saying that the growth visibility for the next year or maybe even a year after that is still there.
So I think that the concern really is liquidity. In the Indian context the liquidity has to come from overseas and if the liquidity argument overseas is linked to interest rates in key economies, it does not turn for equities, which means that we don't go into as easy buyers, I think that would be the concern if the interest rate hikes continues beyond September-October.
We are in the cusp of an important decision, which you have been discussing, from the FOMC, in the events that the US FOMC does indeed declare a pause; do you expect a rally in the markets be it for a limited period?
I guess certainly there will be a relief rally across the markets and in India, the language that the Fed uses would be very important, my own theory is that there is at least one more hike in Fed interest rates, which is in front of us, maybe now or in the future before it talks of a pause or the cycle that turns the other way around.
In that case what happens to the immediate short-term for the next couple of days if the Fed indeed disappoints the market because at least the currency market seems to be terribly poised short dollar in anticipation of a rate hike not coming?
You are absolutely right but at the same time one should keep in mind that there has been competitive rate hikes by the Bank of England and the European Central Bank for different reasons unless the data for the US shows terribly strongly that there is a slowdown on the corner. Maybe at least the language that the Fed uses even if they pause, would maybe signal not the end of the interest rate hike cycle maybe only a pause in which case there would be a short relief across emerging markets.
Are you seeing any interest in your fixed income funds? Do you think the time has come for the investors or even for the fund managers to look into the fixed income area?
On the fixed income side, a large part of inflows are coming in the liquid funds, the very short end of the market spectrum or the maturity spectrum with two-three months maturity where the interest rate risk is low. So there is certainly interest on that part of the market but the longer-term bond funds are still not exciting any interest.
The other part of the market where there is interest is in hybrid products where fund houses invest maybe about 80 per cent in debt and maybe 20 per cent odd in equity with a fixed medium term where the investor can hope that his capital will not get eroded but there would be some equity upside. We are not far away from the point where if interest rate cycle tops out we would see significant interest come back into long-term bond funds.
Disclosures:
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