In an interview with Anjali Raulgaonkar from Capital Market Publishers, S. Krishnakumar -Chief Investment Officer - Equity, Sundaram Mutual Fund said, As investors we are positive on cyclical sectors that feed on the economic recovery theme like industrials, engineering & capital goods, transportation and financials.
Mr. S. Krishnakumar
1. The equity markets are turning volatile? What will the key driving factors for markets going ahead?
2016 is a year of volatility for the markets mainly on account of the evident divergence in the monetary policies of the large central banks of the world. The events over the last couple of months have highlighted a much more muted rate hike trajectory by the Federal Reserve (Fed.). On the lower end of the rate spectrum, there also appears to be an increase in the prevalence of negative interest rates in Europe. While, a marginally dovish Fed. read and increasing acceptance of negative interest rates are a sign of muted global growth, it also brings with it some EM attention. It is here that India stands differentiated on the back of its macro strength, fiscal prudence and incremental space for monetary accommodation.
Going into 2016, the monetary policies of the Fed. and the European Central Bank (ECB) are key events to watch out for. While events in China would still remain important, the markets appear much less concerned around any surprise devaluation of the Yuan. Global growth and commodity movements, however, would continue to remain relevant.
The last month has seen the start of some EM differentiation. The month of March has seen net FII equity inflows for nearly every single day. Continued differentiation would highlight India's macro fundamentals and bring more FII attention to the one of the fastest growing economies.
2. What are the essential traits for the stocks to be in your portfolio?
As a fund house we largely believe in India being a growth market and hence play growth. Growth comes from two streams - emerging business opportunities driven by regulation, reforms, technology and demographics & also through differentiated or niche players in mature sectors. We use a GARP - Growth at reasonable price - approach to investing and valuations broadly.
As for as essential traits for stocks selection, we use the 5S approach - Simple business, Scalable opportunity, Sound promoter/management, sustainable competitive advantage which ensure strong profitability, cash-flows for growth capital and right allocation.
3. How are the market positioned to face global clues?
As mentioned above, macro strength, fiscal prudence, inflation control and easing space make the case for India to clearly stand out amongst its Emerging market pack.
4. Which sectors you are considering attractive from investment point of view and why and which sectors you are avoiding and why? What kind of stocks never enters your portfolio?
The economy is getting back on track while benefiting from lower inflation and rates. As investors we are positive on cyclical sectors that feed on the economic recovery theme like industrials, engineering & capital goods, transportation and financials. The potential rise in disposable income on the back of softening inflation in urban India and the seventh pay commission largesse will definitely help consumer discretionary sectors like automobile, lifestyle products, durables, retail and entertainment. These represent our positive bias while we remain negative on Pharma, FMCG, Telecom, IT and Metals.
5. How you'll rate the Union Budget 2016-17 on a scale of 1-10 and why? Any particular announcement in budget which will impact your business, how?
Every budget must be read in context. Given the current challenging backdrop, the simple act of holding on to a fiscal deficit target of 3.5% reflects the government's intent to reform. We have no doubts that this target will be achieved in FY17. Its broad conservatism on tax revenue and expenditure projections works further in adding conviction.
The budget promises to revamp and optimise the way the economy functions. In the overall scheme of the budget, the rural economy appears to receive more attention. It starts with addressing the need to bring about income security rather than food security. It proposes extensive electrification of villages, increases the penetration of rural roads. It also attempts to bring about MSP transmission for farmers, increases credit flow to the agricultural sector. It encourages states to pass the APMC act and join a common e-market platform for agricultural marketing in wholesale markets. It empowers the gram panchayats and municipalities and makes sizeable allocations to them. All these over time would greatly work in favour of structurally easing the food inflation component in the CPI. This would give sustainable medium-term comfort to the RBI on rates.
Overall the budget keeps the infrastructure investments going while renewing attention on farm, rural sectors in order to push for a balanced growth.
6. How often do you re-balance your equity allocation?
Asset allocation between equity and debt in our hybrid funds are a function of the mandates that we run. Within the permissible range as per mandate, a monthly review is done.
7. Kindly share your investment strategy with us. Are you making any changes to your scheme's portfolio as we witness change in market?
From a top down approach, our portfolios are geared broadly for the economic recovery seen, driven by the thrust on infra spending. Another theme we are playing is on the beneficiaries of the global commodity deflation across different sectors. The recent focus on the rural and farm sector along with the seventh pay commission largesse should help the rural story.
While one may look at these broader themes, the Indian equity market remains a stock picker's delight with bottom up investing generating alpha for the investors. Our schemes like Select Midcap, Smile, Entertainment Opportunities, Infra and Equity multiplier are clear examples of the same.
8. What would you like to advice to the investors in the current scenario?
2016 has seen the markets swing both ways, being mostly influenced by global markets. This very volatile nature of the markets in 2016 highlights the relevance of SIP investing. It also brings out the importance of staying invested.
The Indian story is a secular one that has been unfolding steadily over the last couple of decades. The longer an investor stays invested, cognisant of her risk-return threshold, the more beneficial it would be for her. Refrain from timing the markets; leave that to fund managers with a proven record. Anytime is a good time to invest in India. Times of market weakness are even better periods.
9. How is India Inc's earnings picture getting affected by the collapse in commodities? Is it possible to scale it?
The weakness in nifty / broad market earnings in FY16 can be clearly attributed to the significant drop in earnings of commodity companies. Nifty ex global cyclicals &psu banks has been delivering about 8-9% earnings growth.
10. When and how do you see rural consumption recovering?
Back to back poor monsoons have greatly affected India's rural consumption. While the roll out of the pay commission would be a welcome boost to consumption in general, good monsoons would hold the key to a sharp revival in rural consumption.