‘We would look for businesses which are more India focussed'

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We would be bullish on financials and pharmaceuticals sector. IT too is well placed though the rupee appreciation against the dollar can be a source of worry.

Aarati Krishnan

Mr Krishna Sanghavi, Head of Equity, Kotak AMC shares his views on the outlook for the markets and sectors to bet on.

Actively managed equity funds have had trouble outperforming the indices in 2009. What's your comment on this?

Yes, the actively managed funds as a space had difficulty in outperforming indices last year.

We, however, think the last year was a special year, considering the events that started with the Satyam scandal, global sell offs in risky asset classes till March, unprecedented policy action towards economic support and revival globally and the Indian elections.

On the whole, the markets witnessed a sharp recovery over a short time-frame wherein the upside was not captured by funds as the bias was defensive.

Many funds were either in cash or had a defensive stock / sector bias towards the market through stock and sector position. So what we saw in 2009 was possibly a one-off phenomenon.

Why did Kotak launch a Nifty ETF recently?

We would like to offer the investors a complete bouquet of investment products range wherein a set of actively managed funds are complemented by passive strategies and hence the decision to offer ETFs.

What is your perception of valuations which for the Sensex are now at over 20 times trailing earnings? Are expectations of earnings growth next year too high?

The markets typically discount expectations in advance so we do not get a true perspective on valuation by evaluating trailing earnings; especially where the trailing period includes some tough quarters for economy in recent history.

We believe the markets are factoring in earnings growth of 18-22 per cent for the year ahead and this seems reasonable, considering the GDP growth rate and overall momentum in economic activity.

Would you say that there are more opportunities in the mid-cap space for investing? Will their earnings be impacted by rising interest rates?

Yes, we see the valuation gap between the large caps and mid-caps narrowing in favour of the latter.

Mid-cap companies are likely to deliver incremental outperformance on both earnings growth as well as in returns.

Interest rates going up may have a selective impact on profitability of some sectors / companies. However, we believe that the growth rate in revenues and earnings will be sufficient to absorb impact of interest rate hikes.

Last year, a good portion of the FII flows went into the primary rather than secondary markets. With the upcoming supply of IPOs, what will be the picture on liquidity this year?

We think that for a good company at an attractive valuation, there will be enough liquidity available. There should be no worry from that perspective.

The stock market rally has taken prices beyond most people's expectations. Have you increased the cash component on the funds that you manage?

Considering the overall outlook on economy and market valuations, we do not see a need to raise cash.

What are the sectors that you would be bullish on, at this point in time?

We would be bullish on financials and pharmaceuticals sector. IT too is well placed though the rupee appreciation against the dollar can be a source of worry.

In most other sectors, it would be better to be stock selective.

We would look for businesses which are more India focussed like consumption and the domestic capex cycle, where we expect a revival.

What is your sense of the ongoing earnings season?

Overall, the results have been in line with the expectations. Sectorally, there have been positive surprises from IT companies and private sector banks while some disappointments from infrastructure, construction and real estate sectors.

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(This article was published in the Business Line print edition dated February 7, 2010)
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