‘Risk appetite has gone down as everybody is reading headlines’

The clients of Toral Munshi are not too enthusiastic about equities right now. But the head of research at Credit Suisse Wealth believes that the time is ripe for wading deeper into equities despite the extreme pessimism.

A mix of government policy action, a pick-up in industrial and infrastructure activities and the stabilisation of inflation bode well for the second half of the year which is why she is advising her clients to lower cash levels and adopt a more aggressive deployment strategy.

While she advises to hold on to defensive sectors such as consumers and pharmaceuticals, she says interest rate sensitive sectors too are looking interesting. Among the sectors she is bullish on financials and automobiles which have seen a significant correction and are trading at attractive valuations.
Excerpts from an interaction with the media at the Credit Suisse Wealth Management research roundtable:

How closely are you watching capital flows?
The worst of the bad news that we could have had on India has come out and yet the money has not flown out, which means that we have investors who are here for the long run. The investors have actually moved the money out from not-so-good looking sectors to sectors which are looking good. That is also the reason why you have over valuation on some of the consumption theme companies right now.

There is internal rotation happening and unless you are able to capture that rotation in a very short time you are not able to generate good returns.

Are there any major risks in the second half?
I don’t think there is a capitulation coming in the second half. Our global view is that Europe will manage its problems. If the capitulation has to come this year because of global factors it would have to come because of Europe. If it has to come through because of domestic situation it would have to come because of the political situation which I would say is the biggest risk today that could cause markets to go to 16,000 and 22,000 not getting achieved. That risk remains. But I would lay a very low probability of 10-15% to such a thing actually happening.

In the second half of 2012, people will start factoring in an interest rate hike in the US which means that global liquidity which is there right now may suddenly cool off. People will also shift their focus from European debt to US debt. And I think capitulation would come in global and Indian markets next year because of US markets not Europe next year.

Index of industrial production numbers came in below expectations at 5.6%. So, is the growth slowdown more severe than anticipated?
The IIP numbers seem very surprising considering that a lot of other indicators are not doing as badly. Export of capital goods is showing such a strong growth. If you look at auto data, it is showing strong growth. Though it has weakened in the last few months, it is still positive. If you look at most corporate earnings, they have not shown a great decline but the IIP data continues to show a decline. Most economists had expected it to be in the 8% range.

How is the order flow of infrastructure companies?
If you look at the order announcement data, clearly there is some bit of up-tick. On the construction side, for example, order books have not been much of an issue. It has been more of an execution issue. But clearly, even in terms of awarding activity, there has been some bit of up-tick. Even on the power ancillary side where there was absolutely no announcements being made, there has suddenly been some bit of announcements.

So how long is it before you see a turnaround in infrastructure stocks?
We are watching it. There are two aspects to investing—by looking at data and looking at valuation. The valuation is already looking cheap for some of the companies in the construction pack. But my concern is that the industry has undergone a structural change. In the past cycle, these companies had a lot of equity which they could dilute, but now they don’t have that option.

The only immediate trigger is a turn in the interest rate cycle where we are talking about a pause, but not a decline in the interest rates. So clearly it is some time before you could touch the construction pack. The infra owners would probably look much better than the construction companies.

Can you tell us about the risk appetite among your clients or anecdotally amongst institutions?
Institutions have the option of moving out from one market to another. So they keep moving their money into other markets, whichever appears cheap at a given point in time. But domestic investors don’t have a choice. Risk appetite is a function of how your portfolio is positioned.

Aggressive investors, with large mid-cap exposure, have really stopped doing too much because they are sitting on losses which are higher than the market fall. On an individual level, some mid-cap stocks are down 20 to 40%. The defensive investors have actually done better this year. The portfolios which were constructed with a 3-5 year horizon and were more defensively positioned with more structural themes in place and high exposure to consumer and pharmaceutical companies have given positive returns this year. But risk appetite has gone down because everybody is reading the headlines.