‘Defensive stocks are holding up the index’

The indices aren’t falling sharply because defensive stocks now account for a 65 per cent weight in them, and they would not decline 60-70 per cent, says Anup Maheshwari, Head-Equities, Executive Vice-President, DSP BlackRock Investment Managers. Excerpts from an interview:

Your flagship equity funds, DSP BlackRock Top 100 and DSP BlackRock Equity, seem to have slipped in performance. Why?

Though our equity performance lagged until a month ago, a lot has changed in the last one month. Most of our equity funds are in the first quartile for a long horizon and second quartile in the shorter term. It’s the positioning which makes a fairly significant difference in this market.

The underperformance of DSP BR Equity fund may be attributed to its mid-cap bias.

The fund is being managed with an equal mix of large-cap and mid-cap stocks. Unfortunately 2013 has not been a great year for such funds. A few mid-cap stocks have led to the bulk of underperformance.

For instance, we have lost quite a bit in some property names, which we thought were the better ones in the property space. But this underperformance is cyclical. These stocks are cheap and offer good value. The Top 100 fund’s performance has also improved in the last one month. DSP BR Equity fund has consistently outperformed market every year in the last 12 years. Barring the run in the current year beginning January 2013 and in 2009, DSP BR Top 100 also managed to outperform the market for the rest of the period.

Is it time to shift away from consumer and pharma stocks to cyclical ones?

We have seen a lot of money going into the more defensive, quality names and they have become a bit expensive. Now, when we have a scenario where liquidity is shrinking, expensive stocks will take a knock. They are over-owned too.

But within defensives, even as FMCG remains overvalued, pharma is one space where we don’t want to be heavily underweight. Such stocks need to be a part of our structural portfolio.

Besides this, on the tactical portfolio, select stocks in cyclicals — metals and utilities space — have done well. Yet many of these stocks are available for as little as a third of their book value.

We may not want to buy the ones which have already moved up significantly as they will probably present another opportunity. But we are looking at value stocks which are trading at less than half their book.

Do you see the risk of equity pullout by FIIs in the near term?

Yes, FII selling is always a risk. But the rally in the first half of this year was probably driven by long-term investors. Those funds will sell only if they have redemptions. But I don’t think we will see as much of a scramble for redemptions, as we fear. I don’t think the fall will be debilitating.

Even as 60-70 per cent of the market has corrected significantly, the indices don’t reflect this. Is it possible that these global investors take an index call and hence they are not seeing ‘value’ in Indian markets?

Yes, we are still caught up in the index. Remember that the composition of the index is also very different from five years ago.

Now with defensives accounting for nearly 65 per cent of the market, I don’t think that we may go to back to the 2008-09 lows both in terms of absolute index levels and valuations.

FMCG or pharma stocks don’t usually fall by 60-70 per cent.

If you take a two-year view, what sectors look interesting at the moment?

I think from a pure price point of view, the ‘value’ segment of the market is currently under-priced. Some part of it should come back in the next couple of years. The defensive part of the market – FMCGs may take some time, but I think pharma stocks are attractive.

IT companies have the pricing power of currency and right now the environment seems a little better for them and valuations are not stretched. So that could be another interesting bet over a two year period.

Similarly, pricing power in telecom makes it interesting.

The structural story in private sector banks is also intact. Once the correction is done, they would look interesting over a two-year time frame. If we put them all together we tend to be optimistic on the overall market.

Most of your funds are still highly invested in financials. Have you started looking at select public sector banks or would you still want to wait?

That is the part we’ve reduced. Around mid-July we reduced our banking weight by about 5-7 per cent, which helped performance. But again, for a lot of these good banks we have identified price points at which we would like to own them and we will wait and see.

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