The Hindu Business Line : India, a `buy-on-declines' market — Mr Anup Maheshwari, Chief Investment Officer, HSBC Mutual Fund

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India, a `buy-on-declines' market — Mr Anup Maheshwari, Chief Investment Officer, HSBC Mutual Fund

Shanthi Venkataraman

IN WHAT is slated to be a challenging year for fund managers in terms of stock and sector selection, Mr Anup Maheshwari, former Head of Equities, DSP Merrill Lynch Mutual Fund, is in the hot seat at HSBC Mutual as Chief Investment Officer. A former Head of Equities at DSP Merrill Lynch Mutual Fund, Mr Maheshwari has more than ten years of experience in equities research and fund management.

Business Line caught up with Mr Maheshwari during his recent visit to Chennai to get his views on the market, sectors and on how investors should cope with the anticipated volatility in the year ahead.

Excerpts from the interview:

What is your market outlook for 2006?

Clearly, when we try and take a view on the market, we look at two sides of a coin. One is what the fundamentals look like and the other is the flow that is backing the fundamentals in the form of investor interest.

Now, from a pure fundamental perspective, I think everyone has reconciled to the fact that the last three years were a bit of an aberration in terms of growth. Growth would moderate down to a more sustainable 10-15 per cent level. In the last three years all stocks went through a re-rating. That may not continue because when the market starts moderating then differentials in growth also become more apparent. You will have a few companies growing much above average and some growing way below average also. So I think it is going to become a lot more challenging for people managing funds in terms of portfolio selection, sector and stock selection and that is going to incrementally add a lot more value to the investor in terms of returns, if you get it right.

At this point, the top-down story seems to be more bullish as there is consensus that we will grow for the next three-five years. But the bottom-up is going to be a lot more challenging in terms of identifying the right stock ideas. Our sense is, over a three-five-year period, if the economy does well, the market will do well and will be backed by flows. But it may not be as secular as it has been in the last three years. So, can investors expect equities as an asset class to deliver an annualised return of 15 per cent over five years? Maybe.

But it won't necessarily come year on year. You will have volatility associated with that return.

What is your take on liquidity flows?

I think flows will continue. One clear structural change is that this market performance is also partly due to a change in the ownership of this market.

Foreign investors have gone from owning 7 per cent to 20 per cent, and that should continue because in the region they own much more.

Unlike in the past, when India was a market in isolation, today it is more aligned to global market movements. Emerging market flows will influence it. How emerging markets fare will affect India as well. So that's the upside and downside of FII money. But the flows will continue because ownership in India is still relatively limited on a global basis. So that at least gives us the comfort that the risk side is controlled beyond a certain level.

At times, we have noticed a divergence between flows and performance in the short term. If you look at last year, Korea saw FII outflows but the domestic interests supported the market very well. In comparison Taiwan saw huge inflows but the market did not perform as well.

What do these anticipated trends mean for investors?

Indian stocks continue to be "buy on declines". From a pure valuation perspective, we can argue that 14, 15, 16 multiple is fine. Rather than getting fixated on short-term valuation, as long as it is not hugely overstretched it is fine. The sum of what I am saying is that flows will continue, but you have to be more stock- and sector-specific. You can make money out of the market but you will be tested in your stock selection.

What sectors are you bullish on?

In the near term, the markets will pay for sectors that have either earnings visibility or valuation in their favour. Earnings visibility is strong in auto components. It is strong in engineering, but you have to balance it out with valuations. If you are bullish three-five years on the macro scene, then banks would have to play a role and, to some extent, you can argue that valuations are on your side. Going further down the chain, mid-cap pharma offers a lot of opportunity and growth. Technology stocks may run into earnings headwinds from 2008 when they begin to get taxed, so you have to be careful.

What impact would disinvestment of the non-navratna PSUs have on the stock market?

It goes against conventional logic of demand and supply of stock.

At the same time, what we notice is that when there is a build up of institutional ownership in a market, they (the investors) like a certain supply of a stock. Actually more capital is attracted because the size of the market, the width and the ability to participate, rises. When Maruti listed, it actually got people looking at the auto sector in India and they started looking at other companies. It actually ignites interest. So it is good. In a bull market, it is good. In a bear market it becomes a problem.

We have a large number of IPOs in the pipeline so some of the flows could just be adjusted in the IPOs and may not have as much of an impact on the market.

So, we need some amount of flows just to keep the market where it is right now. It is good that they (the IPOs) would attract capital but they will also absorb a lot of that capital.

HSBC Midcap has a restriction on the fund size. Is there an optimum size for mid-cap funds?

Yes, I think a restriction accords the fund manager with a better ability to perform. So it is a compromise between performance in terms of returns to the investor and the fund size and revenues you want out of the product. When you have a smaller corpus it is much easier to outperform because you can manage your positions better. Particularly in the mid-cap space, the size of the fund influences management.

If I have to segment this market, the largest company is ONGC. The market cap there is $40 billion. The 100th company in the market today has a market cap of Rs 3,800 crore. Above Rs 3,800 crore is large cap. The 200th company is Rs 1,600 crore. That range you can call is mid-cap and anything below that is small -cap. The way we conventionally look at it is if Rs 1,600 crore and below is small-cap, then that is the size you should achieve. Because otherwise, every one per cent you buy in your fund you are buying that much percentage in a company. So let's say up to Rs 1,600 crore you can accommodate as a small-cap fund and not beyond that. That is generically speaking. The smaller it is below that the easier it is to manage.

What do you expect investors to do on the first sign of a reversal in liquidity?

You got to be true to what you set out to do. The value of a systematic investment plan is very clear. It is an automatic asset allocation. The logic of a time-frame is when you need the money.

Through your earning phase you make the investment and through the non-earning phase you want the returns. So that's your time frame and stick to that discipline and don't let the market influence you in between. When you are talking of a 15/20-year time-frame, this will be a small blip in that. A 1000-point correction you will hardly remember 15 years from now.

So it is not "when" you invest that is important to making money, but "how" you invest. That people forget. Get your process right rather than try and be extra intelligent about where the market is. Just believe in the asset class.

Merits of 'buy-and-hold' strategy

IN A bull market such as this, long-term prospects tend to get factored in quickly. In such a context, will a "buy-and-hold" strategy work?

Anup Maheshwari: I have got a small theory on this. For a direct investor, you have to categorise the kind of stocks you are buying and then decide whether to buy-and-hold or not.

In cyclical stocks, there is no point in a `buy-and-hold' strategy. You have to understand the cycles. In defensive stocks, where there are consistent returns on equity and some element of growth, even if you go through a two-year horrible cycle, a buy-hold works better. In growth companies, the timing comes into play. You got to identify a curve and be there at the right time. So we tell investors who want to do direct investment to identify their skill-sets and focus on that segment of the market.

If you want to follow a `buy-hold' approach and buy all the economy-based companies, you will make money for a while, but over the second cycle you will lose all of that. When you are investing in funds, you get a bit of that diversity. They manage the cyclicals more actively and the defensives more passively.

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