After a volatile 2015 investors have their hopes pinned on the new year to bring some cheer back to the Indian equities. So will 2016 be a better year for the markets? Where should investors place their bets? Bloomberg TV India spoke to veteran investor Ramesh Damani to get a insight on value investing in 2016.
How will 2016 fare for the markets? How to manage those expectations — because even now investors are hoping for some kind of astronomical returns from equities?
That never happens. The richest man in the world Warren Buffet compounds his money at 21 per cent. If you can move your money at 21 per cent or double your money every three years you are doing absolutely fine because then the power of compounding picks up. As the base keeps growing you will end up after 25 years of investing fairly rich. So that’s really the magic. I hope 2016 is more like 2015. The market rewards efficient capital allocation. It is not supposed to reward ETF investing, index investing and large cap investing. It is supposed to reflect long-term risk and long-term growth prospects, which is exactly what the market did this year. I think you had the best market for stock pickers. You had moves in large cap, small caps, PSU banks and just about across if you had picked your stock correctly.
I think it will. The real GDP is ahead of nominal GDP because of deflation. The real interest rates are attractive, so savings are coming back to India, savers are getting rewarded and mutual funds are experiencing $1 billion a month in flows into their accounts. Now, when they are buying large caps they are met by selling from FIIs but while they are buying small and mid-caps these are virtually under owned shares. Those are spiking up. Money is coming up and market is being very efficient about rewarding good corporate governance and it is tax free so it is great for Indian investors. There are great opportunities still available in small and mid-cap for investors.
Talking about the money coming in the market, how do you see the liquidity situation?
I think domestic liquidity is very strong, and continues to remain strong. We are getting $1 billion a month coming into Indian equity funds. They are finding opportunities. Domestic money is good and will continue to remain strong. Indians have finally discovered equities are a good way to go, dividends are tax free and you need to move to equities. The process is slow but is happening. Foreign liquidity remains a question mark but I think India will stand out. Foreigners have been selling — it has mainly come from the sovereign wealth funds. But at some point — after corporates earnings are up and the country is growing at 8 per cent — money should come back.
What are your expectations when we talk about the banking sector?
Something that I have avoided all my life is investing in PSU banks because there is clearly a latent problem out there. It requires surgery to solve the problem. It is not a sector that I am very positive on.
Taking a cue from the NBFC space, what are the other areas you are focusing on?
I have some old investment in a couple of companies that I will not recommend at this point. But I have owned Sundaram Finance and Gruh Finance and others and continue to like them. In terms of other sectors that I like I have often recommended media stocks to you and they are now breaking out the pact as whole. You have already seen the content companies break out. I think we will follow all the dish and cable companies now breaking out. So media as a whole looks very promising to me. I think there is a lot of value left over the next few years.
Logistics was something you looked at very closely last year and it did not deliver as expected. Will it remain on your list for 2016?
Logistics will do well but they are not well priced. Stocks are up — some of them are 4x, 5x or something in that nature. What we try and do in the market is find the unknown because we get them cheap. I think value investors always hunt for things very cheap. I still retain a position in logistics. I do not think it in the bargain basement anymore. I would keep up on the holding but probably would not buy them.
When we talk about the media sector and the potential there, what are the recent changes taking place? What potential do you see in content companies?
It is pretty enormous. I do not know how it plays out. It is very difficult. It is a huge challenge. But I am not sure which of these will work — cable, dish, internet — but people will want content. No matter what you do, you want something good to come on your laptop, PC or smart phone or your television. The first line of investing in media is to look at the content companies because that is where the big driver is. So you know whether you look at news or sports, if you can produce content, tap into digital, music, tunes, that are a good productive place to be in.
What are the other themes that are going to emerge in 2016?
One that has caught a lot of people in Dalal Street is aviation. At some point Jet Airways was available for ₹1,600 crore market cap — they built a fabulous airline over 20 years and the company ran into trouble because of high oil prices. But things are coming back. IndiGo Airline was a wake-up call to the people. My sense is they will go from being under-loved to over-loved because these are actually impregnable businesses. The industry is consolidated. Very few new entrants are going to get into this business now. So we are going to have these three-four players. Fuel, which is such an important component, is now sharply down and looks like it is going to remain down. They have also become ruthlessly efficient. These people have broken up their services and start charging you and I think profitability will return to this industry. The airline sector will move from being under-rated to probably being over-owned before it peaks out.
Do you see a turnaround story for hotels this year?
Hotels rooms are pretty much at sold out capacity, prices are low and the minute they start raising prices they start coming to the bottomline so I think it is a good area to look at in 2016.
You said you were looking to increase the exposure to real estate side...
Absolutely, I have some good investments in major property companies. But you need interest rates to come down for that sector to start booming. If you see interest rates doing down by large margin you will suddenly see this sector flourishing. A lot of larger companies are taking steps to clear off the debt from the balance sheet, and go back to a good corporate governance model. But at these prices I believe to tolerate higher prices or slow growth rate…because these prices are throwing them away. I have never been a big fan of real estate stocks but for the last couple of years I have looked at them very aggressively because they are actually throwing these things away.
Is it safe to conclude that the market is still very much a bull market?
Absolutely, no doubt about that. Last year so many things happened but the market kind of soldiered through all of that so I think will be able to do that again; the bull market that started is still alive. Money is being made on Dalal Street. Instead of watching just the headlines you should watch which stocks are doing well. Money is going to be made and the bull market has a long way to go.