The Hindu Business Line : ‘We can’t play every move in the market’

Mr Satish Ramanathan, Head of Equities at Sundaram BNP Paribas Mutual Fund, talks about the outlook for the Indian economy and the stock market and defends the fund house’s strategy of proactively switching into cash, to protect portfolio value.

Excerpts from the interview:

What is your view on the change in economic fundamentals over the past six months?

In terms of GDP growth, yes, growth has cooled a bit. The key change that you have to look at is on corporate profits and volume growth. Improvement in volumes leads to the growth in GDP. By producing more cement or steel, our GDP might grow, but if that increase in volumes does not lead to profit growth, the markets may not view it favourably. People might see increase in IIP numbers over the next six months but not corporate profits.

What is your view on interest rates?

On the interest rate front, the main issue that we have to see is how the government bridges the gap in the fiscal deficit. It has already extended higher subsidy to fertilisers and crude oil. If the government starts to borrow more, that might cause the interest rates to shoot up.

Midcap stocks despite low valuations have underperformed. What is your view on midcap stocks?

Midcap companies will not perform very well during high inflationary periods. They don’t have high brand equity and they are the last in the value chain and therefore will not have bargaining power.

When the economy as a whole performed very well, they were able to pass on moderate hikes in prices and manage growth through increased volumes. Midcap stocks as a class need not be avoided. We should be selective in choosing stocks; the company should be unique and a leader in its industry.

Sundaram BNP Paribas Select Midcap was one of the top performers in the midcap space, with 100 plus stocks in the portfolio. Of late, the number of stocks in the portfolio has come down. Is this due to any change in strategy?

We consciously decided that the return contribution for a portfolio usually comes only from a select set of stocks. So we decided to concentrate on those. Initially we had 135 stocks in the portfolio but today we have only half of that number. Mid-caps have several risks; so we decided not to take concentrated exposures. But that is not the case with large-cap funds.

Whenever the market goes down, we have observed that Sundaram funds move into higher cash levels. Is it a safety measure or is it done anticipating redemptions?

We don’t have any redemption pressure in our funds. When the market is going through a highly volatile phase, it is one way of protecting the portfolio. We can sell futures but that strategy has it own cost and volatility. The high liquidity regime is not there so we don’t see any great run in the market. But we are reviewing our position and if there are opportunities, we will invest.

Going by the current situation it is better to be in cash, to be able to buy stocks if they are available cheap. Cash positions are to be viewed in two ways: One, to reduce the volatility in the portfolio and two, if a stock falls by 15 per cent, we should have the ability to buy the stock.

The BSE Sensex did move from a low of 12500 to 15000 levels. Some of the Sundaram Funds have managed single digit returns only during this period. Isn’t there a risk to holding heavy cash positions?

I think it is part of the system. We are ready to forgo such a return as we have not seen any structural change in the markets. The bounce-back was due to huge short positions created in the market and it was technical in nature. So we can’t play every move in the market.

Looking at the S&P CNX 500, at least 200 stocks gained between 20-60 per cent during this period. Is it not a good return in a market like this?

It is a good return and we are not denying that. But I am not sure if it is possible to sell the stock at right moment to retain the profit.

We want to a have stable portfolio to track and monitor. We can trade and make money but that is not the mandate. If there any sharp hike in the interest rates, the market might correct sharply. We can buy during that period.

So will you continue to hold cash for another six months? What if the Sensex falls to 10000?

As long as there is no clarity, we are not going to invest in a hurry. If the Sensex does fall to 10,000, we will happy to buy at that level, but that will not happen. The markets will be range bound between 13500- 15000 for the next six months. We are not interested in buying at 13000 and selling at 14000.

SURESH PARTHASARATHY

K. S. BADRINARAYANAN

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