Valuations attractive, so start SIPing: Nandkumar Surti

Nandkumar Surti, chief investment officer at JP Morgan Asset Management, believes the markets would continue to be range-bound given the global uncertainties. However, he suggests people utilise the next 12 months to invest aggressively in equities through systematic investment plans as the valuations are quite attractive. Despite a slowdown in corporate earnings, most of the domestic concerns are already priced in, he tells DNA  in this interview. Excerpts:

What do you make of the sharp fall in Indian markets over the last couple of days?
What’s plaguing the markets at this point of time is a constant ‘risk on, risk off’ situation emerging due to uncertainties on the global front. On the one hand we have the US, where the economic data continues to remain weak and the interest rates are bound to remain low till 2012-end or so — though the official JP Morgan view is not of recession, we are looking at lower growth trajectory in US. On other hand, we really don’t know what the solution for European sovereign crisis is. We don’t know whether they would be going for single monetary authority — which is one of the probable long-term solutions to this entire problem. It’s quite complicated because if you give a one-off solution to Greece, then there are others like Italy and Spain coming for one-off solutions. The problem is there are various monetary authorities at this point of time. While European Financial Stability Facility seems to be the single vehicle for funding purchase of all the bonds, this funding is going to be an issue in the coming months. So, the best case scenario for markets is a narrow-zone movement, but on risk-aversion news, you could see FII flows dragging the markets.

What about domestic concerns? What do you make of the current valuations given the domestic headwinds?
On the domestic side, there are a few concerns like rate hikes by the RBI, inflation or policy standstill, but these factors are more or less priced in. Even though the issue of inflation has not been resolved completely, going by the latest inflation numbers which came in at 9.8%, we are closer to the peak and may see base effect kicking in. The international uncertainties have led to some correction in commodity prices, and the monetary policy action by the RBI over the last 18 months or so have also led to intended moderation in domestic growth, which will cool down the inflationary pressures. It’s too premature to assume that the RBI may pause, going by its hawkish stance and given the fact that inflation numbers over the next 2-3 readings may still come in at over 9% levels. Incrementally, given the kind of international uncertainties, though there is still an outside chance of another 25 basis points hike in key interest rates, the bond markets are already pricing in most of the rate hikes. Also, we expect GDP growth at around 7-7.5%. Currently, the expectations are so low that any incremental positive news — be it some policy action on the part of the government or a probable RBI pause in interest rate hikes in the near term —- would be hugely positive for markets.

In terms of valuations, markets are looking extremely attractive as they are trading closer to their long-term averages based on one-year forward earnings outlook. But whether the markets would be able to resume the upward journey and maintain it on a consistent basis in the near term remains to be seen, given all sorts of uncertainties at this point of time.

Are markets factoring in possible earnings downgrades in coming months?
Among the interest rate sensitive sectors, it’s mainly the auto companies which have been affected. But if you see some of the other industries, services grew nearly 10% —- within that, hotel, insurance, telecom and cement companies witnessed volume growth. Though profitability has been affected by higher input costs, including rising wage costs and higher interest rates, the situation is getting incrementally better. We have seen 8-10% correction in global commodities of late, which should help companies in the coming quarters. Earlier, there were expectations of 22-24% earnings growth this fiscal. Earnings over the last two quarters have been under strain, leading to moderation in earnings growth projection of 14-17%. Corporate profits in the current quarter may again be under pressure, but the the worst seems to be (factored) in.

How do you see FII flows this fiscal, considering most of them are ‘underweight’ on India?
As I mentioned, it’s a question of risk on-off. Also, if you see, in each of the crisis before, Indian markets invariably tend to become very high beta when there are global uncertainties. Apart from that, given the fact that inflation has been a problem for the last 12-18 months, India has been in the midst of an aggressive rate hike cycle which has hit corporate profitability. However, if you look at foreign direct investments, the first five months or so have seen inflows of $17 billion as compared to $21 billion for the whole of last fiscal, which is a huge positive.

Are markets pricing in probable fiscal slippages?
Obviously, it’s a problem for India as the fiscal target of 4.5% (of GDP) seems difficult. We at JP Morgan are already pricing in fiscal slippages of around Rs 50,000-60,000 crore due to a combination of factors —- it could be oil, food security Bill, fertiliser subsidy or even a shortfall in achieving divestment targets. However, the markets have already priced in the same. If you look at the 10-year bond, despite a 150 bps rate hikes over last 3-4 months, the yields on the 10-year bond have been in range of 8.2-8.4%, while the one-year CD rates, which were at 10.15% or thereabouts at the beginning of the fiscal, have come off, so the fiscal part is there in the price.

How are you going about investing in the current environment?
The portfolio is kind of defensive at this point of time. In a way, we are bottom-up stock pickers and so, by virtue of that, it may appear that we are overweight on financials, but the predominant overweight theme currently is consumption. The results have been good with volume growth and decent profitability, so we are selectively positive on consumption goods both in the durables and non-durables space even though valuations may seem to be stretched for the sector. Within financials, we are underweight on PSU banks due to probable NPA (non-performing assets) issues at this point of time, neutral on private sector banks and overweight on institutional players. So, on sectors per se, we are neutral on financials, but due to a combination of select stocks in portfolio, our overall weightage towards banking seems higher. We are also positive on selective two wheelers in automotive space.

How should investors go about investing across asset classes in the near term?
On equities side, if investors use the next 12 months to invest in markets through aggressive SIP route, they can expect decent returns from a 2-3 years perspective as valuations are extremely attractive and even the large-cap companies are available at decent valuations. On debt side, we are currently promoting short-term bond funds, which come in the six months to two years segment and dynamic bond funds (that invest in 5-10 year government bonds). This is from a clear view that the RBI is in the last leg of its rate hike cycle. So, one should put at least 30% of fixed income portfolio in duration funds which he can increase to 50% if the 10-year yield curve breaches 8.5% levels.