Sampath Reddy, the newly elevated chief investment officer of Bajaj Allianz Life Insurance, with assets under management of Rs36,946 crore, was sitting on a cash position equivalent to nearly a fourth of his portfolio at the beginning of this financial year. Now, he has brought down cash levels by half, to 12-13%, and expects to continue deploying money in the next couple of months. In an interview with DNA, Reddy talks about what all he has been buying on corrections, why he feels the slide in earnings is behind us and why a massdowngrade in Europe may not be catastrophic. Edited excerpts:
There were fears of further earnings downgrades. Do you see room for more?
Earnings downgrades have been a feature over the last four quarters. At the beginning of this fiscal, consensus earnings growth for Sensex companies stood at 25%. By the end of the year, however, it is estimated to be only about 10%. Earnings estimates for FY13 (next fiscal) are around 15-18% currently.
We believe the earnings downgrades are broadly over and do not expect much risk of further earnings downgrade. We believe the macroeconomic risks are broadly factored in the current earnings estimates.
Continued rise in interest rates in the last one year on the back of sticky high inflation levels throughout the past 12-15 months has lead to a slowdown in IIP (index of industrial production) and deceleration in GDP(gross domestic product).
The sectors that have seen the most earnings downgrade so far are capital goods and industrial companies due to slower demand and infrastructure and power sector companies due to higher interest and working capital expenses. Both the factors that have led to the downgrade are not likely to affect earnings growth further next year.
Which are the other sectors you are looking to buy into and which would you rather avoid?
Over the last two years, we have been overweight on companies in the pharmaceuticals, consumer staples and telecom sectors. Given the correction in share prices, we have been deploying our cash in companies in the metals and industrial sectors. Also, with interest rates peaking in the coming quarter, we could expect a softening in the Reserve Bank of India’s stand in the coming fiscal. An increase in exposure to rate sensitive sectors, viz banks and non-banking financial companies, would also be explored.
The sectors we are avoiding are the ones whose return on capital employed ratios are yet to bottom out, such as power and real estate.
Information technology stocks have been resilient despite fears of a global slowdown. What’s your outlook on the sector?
Stocks of software export companies continued to do well, mainly on the back of a weak rupee. Currency depreciation has been a big boon for software companies as the extent of rupee depreciation was particularly large and meaningful to have an impact on the earnings growth estimates of the companies, which was not factored into the share prices a few months ago. In spite of the global headwinds on growth, some of the top-tier Indian IT companies are likely to achieve a volume growth of about 10%-plus for the next couple of years.
Inflows from foreign institutional investors (FIIs) have been limited. Do you see a change soon?
FII inflows have been muted in this financial year. We would not bank on any significant FII flows in the next six months as the macroeconomic outlook of the developed economies continues to be weak. Though global interest rates are likely to be maintained at significant lower levels for long period, we may not see much in terms of flows into emerging markets such as India in the short term due to the risk aversion among global investors.
How can downgrades in Europe affect sentiment?
I would think the mass downgrades in EU countries is not a big sentiment factor. In spite of S&P downgrade of US, the US has been the best performing market and US dollar has been a strong currency. More than the downgrade threat, we are eagerly watching how soon the European leaders would find a solution to the sovereign credit crisis of some of its member countries.
What are your biggest domestic concerns?
The key issue that has been affecting corporate earnings growth is a dearth of initiatives from the government for facilitating private capital expenditure growth. Quicker and transparent policy measures in attracting private capital would ensure growth will come back soon in earnings. Also, the higher fiscal deficit and lack of progress on account of divestment (rather divestment overhang on public sector undertaking stocks) is an issue at the moment.
What are your expectations from the RBI?
Growth deceleration has been evident with GDP growth at 6.9%, the lowest in eight quarters. Inflation is also expected to peak now and would come down from the 9.7% levels that have prevailed over the last few months. We believe the RBI’s focus would soon shift from inflation to growth. The central bank has clearly signalled that the interest rate cycle is close to the peak. We think interest rates would come off by about 100 basis points during the next financial year.
Comments