‘Consumption is still a great long-term bet, but beware of unreasonable valuations’

Following the rally in stock prices since 2012, investors will have to unearth value through bottom-up approach opines Lalit Nambiar, senior Vice-President and Fund Manager (Equities), Head – Research, UTI Mutual Fund. He also feels that we could be nearing the bottom of the investment cycle though a recovery could still be some way away.

Excerpts from the interview

With sectors delivering good revenue and profit growth already having run-up, where do you find value in the market now? Is the consumption theme still a good bet?

It has been a flows driven rally rather than based on fundamentals and I would think that even sectors where revenue and earnings growth were modest, have run up. Value will have to be unearthed through bottom-up stock picking. That said, perhaps there is still some opportunity in oil and gas names and perhaps private sector banking.

While at the current juncture one would want to be looking at investment-cycle driven themes, the consumption theme in India is a structural one and as such quite resilient. It may be overshadowed in the short-term by India's immediate needs for an investment recovery, but the consumption theme will endure throughout the time that the demographic dividend plays itself out. Net-net, I think consumption is still a great long-term bet, but we need to be wary of unreasonable valuations.

In 2012, investors did not prefer value stocks (dividend yield, stock trading below book value etc) and ran after growth instead. Do you see this trend continuing this calendar?

As we get closer to the bottom of the investment cycle, the wheel of fortune logically points toward the lead sectors in an investment-led recovery. A lot of liquidity is finding its way into the equity markets while global macro has not really improved; this potentially makes for a very volatile environment. But the 'bottoming out' process could be a prolonged one and there is a real risk of calling the recovery too early. On balance, I think the market will continue to go with growth but there will be many sharp adverse movements within this larger move.

What is your view on commodity stocks? Are they a buy now with China showing signs of revival?

Global economic indicators are still weak. It is still early days to conclude whether the China demand is in fact a revival or merely a seasonal blip, as data seems to show that their markets do perk up around the Chinese New Year, which corresponds to about mid-February in the Gregorian calendar.

Since the valuations in small-cap index have risen very sharply of late, what is your strategy with respect to small-cap stocks now?

Suffice to say that small-caps come with a disproportionate amount of risk, especially in the Indian market context. Given that based on fundamentals there are only a few stocks which exhibit a good investment case, we continue to maintain a low level of exposure in this space.

What is your expectation of earnings in FY14? How do you expect the market to move this calendar?

We should be in the range of 10-12 per cent on earnings growth coming off a lower base, unless there is a global blowout. With stronger flows into th equities worldwide a bit of P/E multiple expansion can also be expected, so our market should provide a return between 15-20 per cent in FY14.

What is your view on the rupee? Are export-oriented stocks a good bet given the structural weakness in rupee and mounting CAD?

From a fundamental perspective the INR fx rate seems to be now quite close to its intrinsic value. It seems to adequately reflect our economic fundamentals relative to those of other major global currencies. The INR looks like it will be flat with a slightly upward bias. The competitiveness of the rupee may not last long as it is reasonable to expect competitive devaluation by major exporting countries, thus the export tailwind from the rupee may not last for long.

How do you expect the FII flows to be in the year ahead?

A lot of money went into DM debt in the last few years, as the economic environment was very unstable. This money went in search of safety but the returns have been poor. Now that some semblance of stability seems to have returned to the global markets, we understand that some of this money is now moving into equities in search of returns, especially into EM equities. Barring an unexpected global blowout, we expect this trend of flow into markets such as India to continue into next year.

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