If you want to make outsized returns, buy during uncertainty'
Global equity markets are likely to remain volatile in the near term in the wake of concerns over events such as Brexit, says Madhu Kela, Chief Investment Strategist at Reliance Capital.
But the former star fund manager believes that Indian stocks will give plenty of returns to the patient, discerning investor.
Speaking to CNBC-TV18 in an exclusive interview, Kela said the Indian economy was growing at 7.5 percent in a world mired in deflation. Over the long term, this would lead to tremendous creation of new businesses and wealth.
Kela -- who called the bottom of the market around its 6,800 lows in February-- added that near-term returns, especially in stocks that have bounced sharply since (such as public sector banks), may be subdued.
"If you want to make great returns, you have to buy during uncertainty," he said.
The quintessential bottom-up stock picker, Kela said investors can find opportunities in any sector -- even real estate -- but he said one overarching theme could reward investors: consumption.
Below is the transcript of Madhu Kela’s interview with Anuj Singhal on CNBC-TV18.
Anuj: What's your outlook on the markets?
A: It is going to be a little volatile, because you are going to have so many global events, sometime it is going to be Brexit, sometime it is going to be Fed rate hike, there will be a lot of noises and we must not forget that we have had 40 percent global market deflation which is going on. There is USD 11 trillion of money which is earning absolute negative interest rate even in a country like Germany. Against all that, if the country is growing 7-8 percent and we are making 15 percent return, it has to be looked at in that context, so whenever there is a panic, you have to have the longer direction clear. So, whenever there is a panic, that is a real opportunity because there is nothing else which you can discover. So, India is not an undiscovered story anymore. So, it is all discovered. So only when there is a panic and you have a differentiated view, that is when you can make.
Q: So, that panic was there at 7,000 and you gave a call that go out and buy regardless of all the – you said everything is now priced in, that panic is no longer there and the market has rallied 12 percent or thereabouts.
A: If you now come now, you will make that much less return.
Q: But you will still make return.
A: Yes, you will still make return.
Q: You think what, 30,000-40,000 Nifty in some years?
A: I would say that there is a lot of wealth which is to get created. I do not know where the index is going to be. To me it stopped mattering where the index is. But a lot of new businesses will come up, a lot of wealth will get created. When you go from USD 2 trillion to USD 6 trillion, USD 8 trillion gross domestic product (GDP), over the next 10-12 years and you have so many dynamic business changes, disruption which is happening, so as long as you are agile, there is a lot of money to be made.
Q: But purely because of this Brexit and all, what is the downside? Do you think, we have actually put a bottom in place. We are not going there.
A: Of that I am very confident that because the earnings have improved quite a lot in the last quarter and I believe this year earnings will improve, we are looking at a good monsoon. So, I do not think those levels should get revisited.
Q: Stocks or sectors to buy right now? Non-banking finance companies (NBFC) have done well. Industrials have done well. Commodities have done remarkably well. What do you think is going to do well from here?
A: I would say again, rather than focusing on real sectors, I am saying anything which is really referring to consumption, because you see Seventh Pay Commission. That is one theme which is very intact in India. In one way, all these housing finance companies, all NBFCs are representing that theme because you lend money to companies which are in a way consuming. So anything which is linked to urban consumption even within that is most preferred. Then you will have a plethora of smaller themes or smaller companies like pharmaceuticals. It is getting slowly out of fashion and we spoke about pharma, but it is not a business which is going to die down. At some point of time, because your underperformance is so severe, you will have some companies which will become very attractive in the pharma side.
We spoke about public sector banks and you are seeing all of it actually playing out. When you bought, when things were really darkest, that is when you made money.
Q: I remember you saying that it was a good time to buy PSU banks, but is still a good time to buy PSU banks, SBI has rallied a lot.
A: If you have a three year perspective, I would say yes.
Q: You will not go wrong with PSU banks?
A: I do not think you will go wrong, because so much is being discounted. Even my driver knows what is wrong, how much NPLs are there, what can happen. But I am not saying random. It is not a sector call. You cannot go an buy any public sector banks which has listed. But the ones we have been more prudent have provided a lot are being more proactive and are really active on recovery. There is a lot of value which is there.
Q: So that is some pharma stocks we discussed, some banks and all, some consumption, some NBFCs. What else excites you in this market right now?
A: Bottom up. I am a bottom up idea man. I am saying in every industry, you will find a real winner.
Q: Any couple of themes that you tell us.
A: I do not want to talk about stock specific. I wish I could talk about stock specific names, trust me.
Q: Our viewers are intelligent, they will understand. So, if you could just give a couple of themes.
A: Talk about real estate. It is absolutely in doldrums. There is no one who believes that this sector is going to get revived. The companies are actually trading at 0.2 or 0.3 of the real book value. I am saying that because of whatever has to happen over the next 5-10 years, if you are an investor who has faith, and again, I am not talking about real estate sector, you do your homework properly, you see where the debt of the company is coming down, you see where the ROE is improving, you see where the promoter is extremely focused. You will eventually end up making money. My philosophy has always been, you cannot whatever is very fashionable, you can make standard 10-15 percent return but I will get excited when I see that I can make 3-5 times return. Now, when you want to make that kind of return, you will always have to buy it at uncertainty. And sometimes, 70-80 percent of the time, logically, the future must unfold as you are thinking. But 10-20 percent of the time, it will go wrong. So be it.
Q: So that of course is a couple of real estate stocks and your theme is bottom up investing and that is going to continue. Any other sub-theme that you identified off late?
A: No, frankly not. We are looking at a couple of ideas but have I reached to any conclusion, the answer is no. Like defence, it is going to be a big business. Again, it is going to be a big business, Pandora ’s Box has opened, the domestic companies in the defence sector have been given preference over the overseas companies. You remember how Maruti came up? 10-20 years back there were no auto ancillary companies. And now there are a plethora of them. So, when the defence industry is full blown over the next 10-20 years, there will be a lot of companies which will emerge suppliers.
Q: What is the key risk to this market from here on?
A: Key risk remains actually global to be honest. If something really unprecedented happens globally and this deflation which we are talking about, actually accelerates and we cannot rule out in that place’s market, you see the debt burden has gone up 2.5 times. And the interest cost globally is still down 11 percent versus 2.5 percent of the global GDP. So that must speak on a 2.5 times higher debt, you are paying less interest as a percentage of GDP. So, money is very cheap. Anytime that reverses, it will end up disrupting a lot of things.
No comments:
Post a Comment