Mutual Funds

Macro factors will decide 2012 market movement

Suresh Parthasarathy | Updated on December 10, 2011

Mr Anoop Bhaskar, Head of Equity, UTI Mutual Fund.   -  Business Line

From our point of view, we will increase our weight in interest-rate-sensitive sectors rather than FMCG. Mr Anoop Bhaskar, Head of Equity, UTI Mutual Fund

Equity markets, over the last few years, have given sleepless nights not only to lay investors but to fund managers as well. Both bellwether indices, Sensex and Nifty, lost 15 per cent in 2011 even as fixed income instruments delivered far superior returns.

We spoke to Mr Anoop Bhaskar, Head of Equity, UTI Mutual Fund, for his view on equity markets in 2012 and the prospects for top performing sectors such as FMCG and pharma.


Do you expect 2012 to be a better year for equity investors compared with the last few years?

There are four or five macro indicators to be taken into account, and how they have moved in the past decade, to answer this. You have to look at the numbers in 1990s, rupee-dollar rate, GDP growth, fiscal deficit in percentage terms, GDP growth, inflation rate and the 10-year government securities yield.

A decade-ago-data reveals that the 10-year G-sec was 9.5-10 per cent, inflation was more than 10 per cent, fiscal deficit was about 6 per cent and rupee depreciated from Rs 13 to Rs 45 (in January 2011). During the decade, rupee appreciated up to Rs 37 in 2007 and fiscal deficit fell from 7.5 per cent to 3.5 per cent before the global meltdown. Our G-sec fell from double digit to 4.5- 5 per cent.

So all this broad macro environment pushed up the market seven times from the low of the IT bubble in 2000 to the high in 2010. From 2010 till now, the dollar has depreciated from Rs 44 to Rs 52, fiscal deficit moved up from 3.5 per cent to 6.5 per cent, inflation was up from 6 to 9 per cent. The 10 year G-Sec yield moved from 6.5 per cent to 8.5 per cent.

So over the next two years, if we don't have clearly stabilising macro economic factors, what happened in 1994 and 2000 will be repeated. The market will be range-bound as in the past. In the 1990s, we had markets at the 2,800-4,200 band in Nifty. In a sideways market a buy and hold strategy will not work. So, investors should be bearish at the top of the market and bullish at the bottom of the market.

But this will require timing the markets?

I am not suggesting investors time the markets. I would advise them to build their portfolio when the media talks of doomsday. If we are close to trailing price-earnings ratio of 10 or price to forward earnings of nine times, that is the time to start building the portfolio. When the same becomes 13-14 times then one should look at reducing the portfolio.

In our interaction a few years ago, you stated that FMCG is a defensive sector and you would prefer to limit your exposure. But over the past three years FMCG continues to outpace the market. What is the outlook for the sector?

The growth rate for this sector is largely driven by significant government programmes, social spending and higher minimum support prices for agriculture produce, which leads to higher income in non-urban area. Besides, land price appreciation across India along with increase in prices of gold — Indians are accumulators of the yellow metal — led to higher consumption than what we would have estimated in 2008-09. We said that this sector was defensive vis-à-vis the market rather than based on the key attributes of its operating environment.

The stability in earnings and steady growth in FMCG companies has been lapped up by investors. This trend is not limited to India. We have seen this across all emerging markets. From now on, though, it is going to be difficult for FMCG because its valuations are far richer compared with 2008 and also compared with the broad market where it operates. Secondly, the incremental increase in MSP prices and increase in spending by the government will not be as high as in 2008-10.

Lastly, due to higher inflation, these companies will have a tough time in protecting their gross margin as is evident in the quarterly results of September 2011. Therefore, if an investor is building high expectation on growth he will be disappointed. On the other hand, if the market remains as volatile as it is now, then investors will prefer to overlook valuation for the short term and hold on to FMCG stocks to avoid negative surprises at the time of quarterly results.

But we would find very few portfolios adding their weight on FMCG. From our point of view, we will increase our weight in interest-rate-sensitive sectors rather than FMCG.

What are the reasons for decline in the growth rate of Indian pharma companies in the first half of 2011?

My main concern is on the new pricing estimate of the government. This could lead to some amount of reservation about the profitability of these companies. There is a clear trend in the last two years that domestic-focused multinational companies have seen very sharp increase in their valuation because of buoyant domestic market.

I think these companies could get spooked for a short period of time till the policy is out, after which we will know the actual operating profitability of these companies.

The Indian companies are more multinational in terms of business mix. Their Indian business is actually 30-50 per cent of the overall business and the rest is accounted by exports and sale to other markets. My feeling is that multinational companies will get de-rated to some extent over the next year-and-a-half, rather than Indian-owned companies.

What is your call on the sliding Indian rupee and its impact on sectors that depend on import of raw materials?

Almost every sector has got impacted by rupee depreciation. For some it could be direct and for others it could be indirect.

So the country, as a whole, cannot afford a depreciating rupee at this juncture. Currently we have higher fiscal deficit than budgeted, inflation is sticky and not coming down, and interest rates are fairly high.

Export sectors such as textile and IT may be the beneficiaries.

But currently CFOs of companies are far more active than the past. We don't know what call they would have taken on hedging the rupee. So, I don't want to make any generalised statement on this. It would all depend on the micro decision taken by companies regarding hedging of rupee or alternative sourcing of inputs.

Published on December 10, 2011

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