Many of the country’s top fund managers believe the recent strong performance seen in Indian stocks is set to go a long way — but some of them want it to go only so much.
At a summit organized by mutual fund-information website Cafemutual for fund distributors, speakers said the mood for business in general as well as for stocks had turned after the formation of a stable, perceived-as-decisive central government in May this year. This has reflected in the sharp movement seen in Indian shares, which have risen close to 30 percent year-to-date (as measured by the benchmark Sensex), outpacing several major markets around the world. “We believe we will get back to 7 percent GDP growth by fiscal year 2015-16,” S Naganath, president and chief investment officer at DSP BlackRock Asset Management Company, which manages about Rs 34,000 crore in assets, said. This he said would result from the restarting of stalled projects that had sputtered to a halt during the economic downturn that had set in over the past two years, in which the country grew at below 5 percent. “Inflation too will gradually stabilize around 7 percent by 2015 while the Reserve Bank of India may cut interest rates by first or second quarter next year,” he said, adding that all of this would result in corporate earnings, which grew at about 10 percent in FY14, to improve to 15 percent this fiscal and 20 percent in the FY16 and FY17. As a result, the Sensex could reach about 45,000 levels in three years, the DSP chief said, assuming the Indian market commands a price-to-earnings multiple of 20 times. (Sensex earnings-per-share should grow from Rs 1,300 in FY14 to Rs 2,150 by FY17, according to Naganath’s earnings expectations.) Given the rally in equities is expected to be backed more by earnings growth than pure PE expansion, it would also be sustainable, Anoop Bhaskar, head of equity at UTI AMC, the country’s fifth-largest asset manager, said. Be wary of behaviour biases But as retail investors, who had largely given mutual funds the cold shoulder after stocks plummeted in the aftermath of the 2008 financial crisis, start plowing in greater amounts of money into them, fund managers will keep a closer eye on valuations, having learnt from that experience, according to Sankaran Naren, chief investment officer of ICICI Prudential AMC. “We are cautiously bullish on the markets as valuations are closer to the average currently,” he said. “[Despite the recent run] we are not in bubble territory.” But he urged the audience, comprising of distributors and financial advisors, to not let their clients stray from their asset-allocation principles, which decide how much an investor should split their investments between higher- and lower-risk asset classes. “If the current run continues, there could be a time a few years from now — I don’t know when that will be — when it will be a good time to become cautious on equities even if it means risking short-term underperformance,” he said. “There will be a year like 2007 when you should be willing to look like a fool.” Naren said the signs of such a bubble would be when equities continue to give outsized returns for several years, when valuations become disconnected with earnings and when “hot themes” (such as IT stocks in 1999 or infrastructure stocks in 2007) emerge. The country’s biggest and one of the finest fund managers, HDFC’s Prashant Jain, lamented the way stock and mutual fund investors had failed to make money even as the index had performed well over the long term. Jain cited the example of HDFC Prudence (a balanced fund), which has grown 45 times since its inception in 1994, compared to seven times for the Sensex. “We looked up the data for the average holding period. Only 3 percent of investors invested in the fund stayed on for more than 10 years, 23 percent for more than five years while 50 percent of investors put in money for less than three years,” Jain said. “Out of roughly 70,000 investors in the fund, only 25 have stayed on since its inception. These 25 investors may have either forgotten about their investment or passed away,” he chuckled. An advocate of low-PE investing, Jain said investors’ force of habit to come back into stocks only after a sustained period of outperformance has always caught them on the wrong foot. “In 2003 [when a long-term bull market was about to take off], inflows into the country’s mutual funds were Rs 118 crore. In 2007 [when the rally came to an end], investors poured in Rs 50,0000 crore.” “The discipline to buy when there is apathy for stocks and not go overboard when they start performing well always pays off,” Jain said, pointing to his 2012 presentation wherein he exhorted investors to buy stocks when they had fallen hard amid a quagmire of bad economic news and as mutual fund investors continued to redeem their investments. “Today, the European crisis is not talked about anymore. India’s current account deficit and inflation are under control [but stock prices have run up considerably since then].”
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