Indian benchmark indices have been witnessing a strong upward rally in the last few weeks. Bhanu Katoch, chief executive officer of JM Financial Asset Management Private Ltd tells Chirag Madia of The Financial Express that the short-term markets may see some corrections, though the outlook for India looks attractive in the long-term. Apart from this, Katoch feels that after the ban on entry load, mutual fund industry will need to work hard to adjust to this change and in the coming days technology will play an important role and it will reduce cost and improve efficiency. Excerpts
In the past few weeks, we are witnessing northbound rally in the Indian equity markets. How do you see the Indian markets shaping up in the next few weeks? Do you think there is enough liquidity present in the market?
Global liquidity is seeking destinations such as India, taking into account it’s relatively an attractive long-term outlook. However, as real investment demand remains muted, an asset price bubble in the property and the stock market in the immediate short-term is a real possibility. We have already seen signs of this. With just $11 billion of foreign institutional investors (FII) inflows so far this year, selective stock and land prices are already approaching previous highs. Imagine the scenario if bulk of these inflows had not flown into qualified institutional placements and initial public offer issuances till date. Policy action holds the key to whether we can absorb enough liquidity to improve our fundamentals or if we will passively go through another boom-bust phase.
What are the major factors which will have impact on the domestic markets in the coming days? Where do you see markets going from these levels?
Markets have bounced back after falling off the cliff in 2008. Following the collapse of Lehman Brothers and the convulsion of credit markets, governments and central banks had let loose an extraordinary amount of fiscal and monetary firepower to cushion the global economy from deflation and demand destruction. Their effort to prevent an economic meltdown and restore confidence had the desired effect. Global equity markets are up nearly 50%, credit spreads have narrowed, economists are raising their GDP forecasts and analysts are pushing up their earnings estimates. There seems to be a lot of good news around. But as investors digest the scale of the rise in global equity markets, their focus may soon shift towards the dilemma – whether this rally is sustainable or not? Every one wants to know if the equity markets have gone too far ahead of fundamentals in the short-term and if so, what is the road ahead? I think in the short-term, there are a number of factors that could potentially undermine the current optimism and may force corrections in the stock markets. Markets may remain range bound over the next quarter or so. Taking these factors into account, we see Sensex at around 18,000-level before March 2010 and in the long-run, we believe Sensex will be around 24,000 to 25,000-level by March 2011.
Apart from that, the quarterly growth rates are looking robust, so the forecast on long-term economic recovery remains intact. Rainfall so far is approximately 20% below mark and this can have an impact only a limited number of sectors, like non-discretionary consumers and to a very limited extent, telecoms and cement.
In the past few months, we have been witnessing cash levels of various fund houses coming down. What is the cash position at your fund house and which are the sectors you are looking to invest and why?
Our cash levels are more or less in line with industry averages. Currently we are around 90% invested in equities. We are bullish on infrastructure, financial services and commodity sectors. We think infrastructure will be one of the key beneficiaries of government’s thrust on this sector and expect investments to accelerate in this sector. This will benefit a large number of companies associated with this sector – either directly or indirectly. In fact we believe infra is a long-term sustainable story in Indian context. Technology can also do very well with signs of US recovery.
The ban on entry load will be completing two months in next week. What are the changes have you witnessed in the last two months in the fund industry? What are your plans for the fund house?
As evident from the industry statistics, equity inflows have relatively gone down. In the short-term, industry will need to work hard to adjust to these changes. Businesses will now become more capital intensive and industry will move from a high margin-low turnover to a low margin-high turnover model. The institutional segment still contributes to 50-60% of the asset under management. In the coming days you will see retail contributing big time to the growth of the industry.
Mutual fund penetration is still restricted to the top 8 cities and about 3% of the households have invested in funds. There are over 5,500 urban towns and 6,40,000 villages in India with a rural-urban mix of 70:30. Incrementally, prosperity levels and literacy levels are going up and that means huge scope of growth.
JM Financial had announced 1% upfront commission after the ban on entry load. What is the current status? How are you planning to increase the profit margins of the fund house in this competitive industry?
Upfront commission will have to come down in the days to come for the industry and for us. As the retails participation grows, we will see stickier money flowing in. This will eventually improve profitability.
In August, we had seen huge outflows from the equity schemes. When do you see inflows once again coming in the equity schemes?
A bit of profit booking at these levels is normal. Industry is also taking some time to adjust to the new regulatory changes. It won’t take long before the industry adjusts to these changes and business starts as usual.
What are the plans of the fund house to target more retail investors not only in the urban areas but also in tier-I and tier-II cities?
As I mentioned earlier, there is huge scope of growth in retail and the small and medium enterprise (SME) segment. Technology will play an important role going forward as it will reduce cost and improve efficiency. We have 15,000 empanelled independent financial advisors with us and we will work with them to reach out to investors. Banking channel will play a very important part in the asset under management growth and once the PSU banks also start selling, the penetration will only increase. There are 300 commercial banks with 72,000 branches. We have currently around 60 branches and 116 investment collection centres to provide service to our investors.
