With a slew of fresh fund offers lined up, the retail investor once again seems all set to take the plunge into equities. Harshad Patwardhan, investment manager - equity, at JPMorgan Asset Management India, however, warns that there could be no quick fixes and when it comes to picking winners, it’s only hard work that’ll count. In an interview, Patwardhan told DNA what investors could learn from the past 18 months of pain in the equities, where the money lies now, and how to grab it. Excerpts:
The Indian equity investor may be just starting to believe that the worst is over for the markets. What in your opinion are the past mistakes that shouldn’t be repeated in the fresh bull run?
There are a couple of lessons from the previous booms that investors might want to use in the future. Firstly, chasing momentum stocks without doing any analysis to check fundamentals may be rewarding in the near term, but will likely prove painful in the long run. Secondly, it is important to have a clear idea of what asset allocation is most suited for the individual investor’s unique circumstances. It is crucial not to get carried away and stick to the discipline of readjusting allocations from time to time.
What kind of asset allocation within equity (perhaps percentage to specific sectors or kinds of companies) would you advice for the Indian investor?
The asset allocation to equities and within equities depends on individual circumstances, including risk appetite. Investors might want to consult their advisors to get a good handle on this.
Generally, small- and mid-cap stocks tend to have a higher risk profile and a longer time horizon, but are also likely to offer better longer-term returns. It is important to take a conscious decision about asset allocation across large-cap stocks, small- and mid-caps and readjust from time to time.
Are there any events or happenings that you think can be a game-changer for the markets in the medium term?
In our view, the surprisingly positive outcome of the general elections was a big game changer. For the first time in about two decades we have a stable government that is more or less not at the mercy of coalition partners for survival. This offers it a chance to formulate and implement sound policies without worrying about short-term political compulsions. Favourable policies from the government in sectors such as infrastructure, agriculture and education can potentially be long-term positives for the corporate sector and equities.
What is your outlook on the commodity sectors? Do you believe that a global recovery is priced into current stock prices for commodity companies? What are the sectors that could be laggards even as a recovery seems underway?
Each commodity has its unique supply-demand dynamics and has to be analysed separately. Generally speaking, while the stock prices have performed well over the last few months, a full-scale global recovery with its impact on demand does not appear to be fully priced in. Generally speaking, defensive sectors such as FMCG are likely to lag in the event of a strong recovery.
Is government borrowing and its consequent crowding of the private sector a big issue for corporates?
We do not expect this to be a big issue. Firstly, there is a strong possibility that the government might push through with its disinvestment programme, which could make a material difference to its revenues. This means that the government borrowing could be lesser than feared. Also, the private sector might be able to tap other sources of funding with substantial improvement in market conditions compared with a year ago.
What is your long-term outlook on the Indian equity markets and are you comfortable with current valuations where the market is trading at 20 times its earnings?
While the relative attractiveness of various markets keeps changing from time to time, we believe India (along with China) is increasingly being considered a core market by emerging market investors. While assessing the attractiveness of the market, it is important to analyse factors such as growth potential, sustainability of growth, profitability and valuations rather than just focus on one parameter.
It is fair to say that we are bullish on Indian equities from a medium- to long-term perspective. We believe that, with the new political stability, the government has both ability and willingness to deliver in terms of infrastructure creation and inclusive growth.
For the first time after several years, corporate India can plan ahead confidently without worrying about sudden changes in policies. In our view, these developments are positive both for the earnings potential of corporate India and also for investor confidence. So, if you combine the two, we expect equities to perform very well over the next five years.
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