MUTUAL FUNDS

We Are Positive on Banks, Consumer Discretionary, Telecom and Healthcare Sectors<
09-Jan-13   17:26 Hrs IST

Mr. David Pezarkar
The banking sector is a good proxy to the ongoing reform process, and will benefit from easier monetary conditions. We feel this sector will continue its outperformance over 2013. says David Pezarkar, Head - Equities at Daiwa Asset Management (India).

We at Capital Market interacted with David Pezarkar to now the outlook on equity markets for the year 2013.

Excerpts:

1) Year 2012 has been good for the markets, including India. How long into 2013 can we carry this optimism, given the way the global economic and political landscape is shaping?

At the beginning of 2012, expectations were extremely low. The investors were expecting a further fall in the Rupee, and a continued deterioration in the macro-economic environment. Things turned out to be better than feared for the stock markets, largely due to strong Foreign Institutional Investors (FII) inflows. The global liquidity situation continues to remain benign. The political landscape in India has improved. Government machinery has moved at a frantic pace during the past six months. Given these factors we are optimistic on the prospects for equities going into 2013.

2) India received good inflow from FIIs in 2012. Do you think India will continue to receive such inflows?

It is extremely difficult to predict the pattern of flows into Indian equities. Currently the global liquidity situation is benign, and it appears that this environment is likely to continue for some more time until well into 2013. India and China are two major markets where there are expectations of incremental positive policy pronouncements. Given this backdrop, global fund managers would allocate a higher proportion of incremental fund flows into these two markets.

3) What is your outlook for 2013? Which sectors do you expect to benefit in 2013?

We are positive on Banks, Consumer Discretionary, Telecom and Healthcare sectors. Some of the regulatory actions like the amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the amendment of the Banking Regulations Act by the Indian Parliament helped the financial sector performance during the past few months. It appears that the pace of worsening of asset quality has ebbed in the past few months. We believe the fate of the sector over the next 12- 18months would depend on how the interest rate cycle and the credit quality cycle pans out.

We are overweight on the pharmaceuticals space as more products go off patent till 2014 in the US market. Indian companies are geared up for this and have a slew of new launches planned. We prefer companies with a large chronic portfolio along-with generic launches planned over the next three years.

In the telecom space, we believe 900MHz re-farming and subsequent auction might be opposed by incumbent mobile operators leading to a legal resolution. We continue to subscribe to the thesis that telecom operators will look to raise tariffs over the next few months.

We are overweight the consumer discretionary space as we feel pent-up demand in these sectors coupled with likely easing of interest rate cycle will translate into faster revenue growth for most companies here. Consumer spending has remained subdued over the past few months largely due to the dampening of sentiment because of uncertain business conditions. This will improve going ahead, as the Government enacts more pro-business measures and the monetary policy stance softens.

Given an incipient global recovery and a weak Rupee, we are incrementally positive on the materials and IT space as well.

4) Where do you see Sensex by the end of 2013?

It is difficult to predict precise numbers for the Sensex, but it does appear that equities as an asset class will yield reasonably good returns over the next few years.

5) Banking sector has sprung back sharply in 2012, compared to negative returns in 2011? Moreover, MF industry's exposure to bank shares has been over 20% of the industry's total equity AUM? What's you outlook on banking sector moving into 2013?

The banking sector is a good proxy to the ongoing reform process, and will benefit from easier monetary conditions. We feel this sector will continue its outperformance over 2013.

6) In India, consumption theme has done well over the past couple of years. Will the trend continue in 2013?

India's strong demographics imply that consumption oriented sectors will do fairly well over the medium to long term. However, to get good returns on one's investment, relative attractiveness needs to be evaluated. Some consumer oriented stocks seem to have priced in higher growth than is reasonably possible, in their current valuations. Given that we expect an economic rebound by 2014, sectors which are more affected by economic cycles should deliver better returns next year.

7) Do you subscribe to the view that a change in the business cycle will improve the performance of infrastructure funds? What would you advise investors viz their holdings in infrastructure funds?

We believe that the Government's initiatives to kick-start private sector capital expenditure, resolution of coal supply issues for the power sector, and easier monetary policy will improve the outlook for the infrastructure sector. However, this will be a gradual process and is unlikely to consummate in the near future. Investors will have to be patient and hold on for two-three years to see decent returns from this sector.

8) Going by the mutual fund folio closures seen in the recent past, do you think retail investors are still doubtful of how the markets may pan out? Do you expect active retail participation in 2013 or will it be another year of fence sitters?   

We are optimistic that retail investors would actively participate in India's growth story through equity mutual funds over the coming years. A small diversion of savings from other asset classes into equities will result in substantial flows for equity mutual funds. A younger and more aware investor class will have a more sanguine approach to systematic investment in equities through mutual funds.

 9) What reforms you expect for curtailing fiscal deficit?

The Government has already taken a number of initiatives, such as the increase in diesel prices, reduction in the number of subsidized gas cylinders etc. A more universal application of the Aadhar - based cash subsidy scheme will go a long way in reducing the subsidy burden.

10) Investment in 2013: Gold, real estate, debt instruments or equities?

We recommend investors should have a balanced portfolio, based on their risk-bearing capacity, liquidity constraints, age profile and future requirements. This portfolio balance should be maintained irrespective of market cycles, except in cases where a particular asset class is displaying characteristics of being in bubble territory.

11) What would be your advice to investors for 2013?

Retail investors in India seem to have a very low allocation to equities. History has proved that a systematic and regular allocation to equities has given very attractive returns, and we expect this trend to continue. Our advice to investors would be to reduce this skew in their portfolios which is against equities in a gradual manner.

Disclaimer: The above views and opinions alone are not sufficient and should not be used for the development or implementation of an investment strategy. Information provided shall not be construed as investment advice to any party. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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