If the debt market is about subtle price changes, equities are all about regular price spurts. Nilesh Shah, deputy MD, ICICI Prudential Asset Management, with his decade-long experience in each of these markets, has straddled them both with aplomb. In a conversation with Chirag Madia and Muthukumar K, he says RBI is creating demand appetite by not raising rates aggressively. He is bullish on the infrastructure sector and has an overall portfolio bias towards large-cap stocks.
What is your view on equity markets?
Indian markets are at an interesting stage; in 2007, it shot up, then in 2008, it crashed and again in 2009, it bounced back. In the last three years we have seen a lot of volatility. From a pure valuation perspective, we are somewhere around 17 times one year forward earnings. So, market is not cheap by any standard, it is probably little above fair value. It?s getting supported at this level because there is no bad news on the global side, the monsoon is expected to be normal and most importantly, foreign flows are coming on a sustained basis in the last couple of months.
The valuation is relative and is dependent on time horizon of investors. If we evaluate on a FY-11 basis, then markets is at fair value plus, but if you extend to FY 12 or FY 13, then one can stay valuations aren?t much of a much worry. Markets has a mixture of investors with varied investment horizons; hedge fund manager will look at one to 30 days? period, there is day trader who will look at an hourly basis, a mutual fund manager who look at one-year basis and insurance and pension fund managers looking at maybe an even longer investment horizon. So, it is difficult to take a call whether at 17 times one year forward market is expensive since time horizons are different for different investors.
Lot of us evaluate markets on a short-term basis. But there are long-term investors who are also evaluating on a ten-year or 15-year basis. For them, India is going to double its GDP over next six to seven years or even quadruple over next 12-15 years. So, when such kind of transformation happens, stock markets have no other option but to follow them.
What?s your take on the RBI hiking key rates and CRR by 25bps each?
Before the policy announcement, the RBI was viewed as prioritising inflation over growth. Knowing that growth was on track, inflation was supposed to take priority. Liquidity, a factor stroking inflation, could have been sucked out of the system had RBI raised rates more aggressively. But, RBI seems to be juggling with another ball ?the huge borrowing calendar?. By not raising rates aggressively now, RBI seems to be creating demand appetite for its large supply by keeping liquidity high and rates low.
The RBI policy was cheered by both debt and equity markets which were expecting another 25 bps hike intra policy in repo and rev repo rate. Another clear beneficiary of the policy is the infrastructure sector in terms of financing because of allowing banks to hold bonds issued by infrastructure companies as a part of their HTM holding and reducing the provisioning on substandard loans (NPLs of < one year ) for projects to 15% from 20% now. This is, therefore, an opportune time to investing in this sector.
Going ahead, markets are expected to respond to the news on the positive side on the better-than-expected broadband and 3G auctions and on the negative side over oil subsidies not accounted in the Budget. As the borrowing calendar progresses, G-sec yields are expected to remain under upward pressure, unless managed through OMO purchases or similar tools.
Will foreign institutional investor flows surpass last year?s $17 billion?
The world has a lot of money and very limited avenues to invest into. American money market funds were at $4 trillion in size and they have now declined to little under $3 trillion. This shows a shift of over $1 trillion. Now they still have little under $3 trillion as of today, which is virtually earning zero interest rate. So, now if we position our economy and markets as an attractive investment option to them and expect a 1-2% shift of assets, it will be certainly more than last year?s inflow numbers.
Could inflation prove to be a party-pooper?
We have different set of numbers to decipher inflation. And WPI (wholesale price index) and CPI (consumer price index) don?t provide a holistic view. A large portion of inflation is illusory, since it is calculated on a year-on-year basis. So, if there is high base effect the inflation comes down, if there is low base effect inflation goes up. So, when you look at inflation, you can?t only just look at the WPI and CPI numbers. The other thing to note is that large portion of inflation on the food side has happened because of increase in minimum support prices. Then, there is oil price inflation that is not reflected in the WPI. Hence, when you put all this things together you end up coming with a slightly confused outlook on inflation.
Inflation is a cause of concern and will remain so. In India we have always tried to curb inflation by raising interest rates, tightening liquidity and curbing demand. Maybe for the first time, RBI is trying to control inflation, by keeping liquidity, keeping interest rates low and ensuring that supply is created. Hence, when you create supply, demand will be met. Now, supply creation is not only a monetary phenomenon; it?s also non-monetary. In other words, there are various forces which will play on inflation. India is prone to inflation because it has large consuming class and supply is constrained. But over a period of time, we will be able to increase our capacity and generate supply and meet ever growing demand.
Oil prices are inching up and are at the $ 85 per barrel levels?
It is a cause of worry, no doubt about it. Higher oil prices impacts the sentiments in India especially in a year when the Budget is not provided enough for the current run-rate of the oil subsidy. It is a concern more from the fiscal deficit side than from the inflation side. So, higher oil prices being not reflected in inflation could potentially inflate fiscal deficit and borrowing programme, which inevitably could crowd out private borrowings.
What?s your current portfolio strategy?
At current valuations we are extremely careful about what we are investing into. We are building portfolios of quality companies which are available at reasonable valuations and staying away from companies that require large debt or large capital requirement to fund their growth.
We are bullish on companies which can fund their own growth even if interest rates go up. The stock picking approach is more bottom-ups than top-down. Also we are little biased towards the large-cap stocks as it provides safety and downside protection. We are also overweight on the infrastructure side sector.