Quality Stock Will Come For a Premium in 2013
Image: Vikas Khot
hen 2012 came to an end, most investors who had the fortitude to keep their faith in equities were happy. In 2013, things are a little uncertain. The UPA government will go into elections in a year’s time. Oil prices are steady but there is a likelihood of an increase. Eurozone is still fragile. To get clarity amidst these confusing signals, we needed some help. Forbes India invited the intellectual cavalry of top Indian money managers: .Prashant Jain, executive director and CIO, HDFC Mutual Fund, S Naren, CIO-Equities, ICICI Mututal Fund, Kenneth Andrade, CIO-Equities IDFC Asset Management and Ajit Dayal, chairman and founder of Quantum Asset Management
And to draw the best out of them, we got on board Ramesh Damani, BSE member, who understands money as well as words. He spoke to them about what they expect from the equity markets in the year ahead. Excerpts from the discussion:
Ramesh Damani: Naren, what are the odds that we start with a new bull market in India?
S Naren: If you go back a year, people wouldn’t have believed that you could see a return of almost 20 to 25 percent in dollar terms. The irony is that we talk about a new bull market after a 25 percent rally in dollar terms; but if you think about it, the market has gone up from a year before. I think the challenges have never been on the corporate side; they’ve been on the economy side. If you see reforms during the year before elections, that would be a great achievement, and we would have a situation where you have an election in 2014 and the continuation of the reform process that started with the bull market in December 2011.
RD: Is the jury still out then?
SN: The challenge is that we are also looking at whether 2013 will be a good year for China. For example, if China gets its act together, the flow of money to growth will get split between India and China unlike that in 2012. If you see the size of the markets and the inflows into Philippines or Indonesia, they are really very small. 2012 was the year when Indonesia broke all rules. They started to increase fuel subsidies; they also started the equivalent of increasing labour wages around Jakarta substantially. So, I’m not clear on Indonesia.
RD: Prashant, what is your opinion? Are the December lows of 2011 going to hold? When did the market bottom out?
Prashant Jain: I think the lows of 2011 should hold, as breaching these now would imply extremely low P/E multiples, which the markets have experienced only in the most extreme situations. This, however, does not imply that the markets cannot or will not correct. In fact, short-term uncertainty and volatility is as much the basic nature of equities as are superior returns over the long run, particularly in a growing economy like India. At the same time, I think the downside is limited and the upside-to-downside is favourable.
RD: What gives you the confidence that the bad times are behind us?
PJ: India has generally changed under crisis and not when the going is good. Change in a way has always been thrust upon us. The challenges facing the economy and the risks of status quo are forcing corrective steps, as there are no easier options left. India has inherent strengths and thus, if we take the right steps, the problems facing the economy can be resolved. We are witnessing a sense of urgency in policymakers, and a number of steps to correct the fiscal deficit, to improve confidence of companies and investors, and to revive the investment cycle have either been taken or are in progress. Though these may take some time to show results, the direction is now right and the worst on the economic front is behind us.
RD: Typically in your experience if the bull market has started, what legs does it have?
PJ: Nil index returns over the last five years, reasonable valuations, likelihood of better economic conditions in FY14, peaking interest rates and high-quality premiums, which are indicators of low speculative build-up, are the things that make me optimistic about the markets in the medium to long term. If you look at P/E multiple charts in the past, they have bottomed out between 10 to 12 times and markets have not peaked out before 20 P/E multiples. They have not gone back to 12 P/Es without first experiencing 18-20 P/Es.