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This global money manager is hunting for value buys in face of slowdown

It has been a quite complex slowdown, but you cannot say it is entirely surprising.

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Updated: Aug 23, 2019, 12.11 PM IST
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Venkatesh Sanjeevi-1200
We are remaining invested and my colleagues who manage the Asia fund also remained overweight on India throughout this period. We continue to look for stock specific opportunities and see this slowdown as a chance to buy some of the good companies at much better valuations, says Venkatesh Sanjeevi, Senior Investment Manager, Pictet-Indian Equities Fund. Excerpts from an interview.

How worried are you about the slowdown that we are seeing? A lot is hinging on what the government could potentially do to alleviate these concerns.
Yes indeed! This slowdown is quite complex. Just the speed and intensity of the slowdown was unprecedented. Same time last year, we were talking about the economy doing quite well across different parameters but today we are at a different position right now. In terms of the intensity, when we talk to people from different parts of the economy like the real estate consultants or maybe the auto sector, they say that they have not seen such a slowdown in years or even decades. So it has been a quite complex slowdown, but you cannot say it is entirely surprising.

To give a few examples, say commercial vehicle space. Commercial vehicles is an inherently cyclical industry. India saw a good cycle for about four years and you could argue that a cyclical slowdown was due at some point of time. Maybe the commercial vehicle axle load norms which were changed last year, allowing lorries to carry heavier weights, hastened the slowdown because the capacity of the system went up overnight. Similarly, when you talk about the NBFC space. After demonetisation in 2016, the entire space grew very rapidly and the growth was not very well planned. Some players were taking short-term borrowings to lend long term; the asset-liability was not matched and really that sort of growth probably was not sustainable.

But what is complex is the slowdown in staples. Recently we heard about companies like Parle saying that sale of Rs 5 biscuit is slowing down that seems a bit more strange and complex in this particular scenario. Our own view is that this slowdown is cyclical and more temporary in most aspects and there is some sort of correction which needs to go through in parts of the economy. That takes time and the reforms which took place over the last few years would take time to get digested. So the slowdown in our view it is cyclical in nature. It is temporary and we are still positive on the long term outlook for India. The country offers a number of good quality companies and good quality management and which we are happy to bet on for the long term.

Apart from the FPI tax concerns, what would you like to see and do? What about other reforms?
In the last five years, we have seen a number of reforms by this government. Some of it is complete and some of it is a work in progress. We would like the ones which are work in progress to continue and reach a logical conclusion. One area where reform is eagerly awaited is on the direct tax side. The Direct Tax Code is due any time soon. Right now. India has got a massive opportunity to participate in the global manufacturing supply chain with the US-China sort of issues happening. There are companies globally looking for alternate supply, manufacturing arrangements outside China and that is where India can actually step up and offer something of a scale, of a size which countries like Vietnam or Malaysia cannot probably offer. For this to happen, the government needs to be more proactive. Maybe ease the land and labour reforms and so we like to see government take steps on these sides.

On the second issue, on the taxation side, frankly we do not know what is the actual stance of the government. Whether the increase in taxation was intended or was it an unintentional consequence because they were looking to increase taxes on the rich and super rich? So it will be nice to get some sense of clarity from the government on what exactly is the stance on this particular side.

Both long-term reforms and shorter term measures are few things which the government has already done and we would like to see some more work on that.

Would you like to also see fiscal stimulus because there has been a huge debate even today, given some of the comments coming in from the Chief Economic Advisor putting the onus on the private sector. What do you feel versus the government’s argument of maintaining the fiscal deficit ratio and yes what do you feel on that front?
Well for a fiscal stimulus to happen, the government needs to have room in the budget which unfortunately is not the case. The government has maintained its part of fiscal consolidation and not just this year but over the last two or three years. And the government also mentioned that a lot of heavy lifting would be done by the central bank where they could personally cut the rates if inflation remains under control. I would keep my hopes on fiscal stimulus in the lower side, given the budget constraint although it could be a short term fix to solve the near-term issues. A bigger question would be what is the longer term view and whether the structural reform process continues or not. That is more important than the short-term fix.

Just a handful of blue chips like Nestle, Unilever, Asian Paints and HDFC Bank are withstanding this fall in the market right now. The rest are all bleeding. As an equity investor what is the strategy to cope with this selloff?
The index is trading about 17 or 16 times one year forward which is roughly in line with long-term averages but the headline really does mask a lot of details. Like you mentioned, a few stocks are trading at extremely rich valuations while a few of the stocks are trading at pretty depressed valuations, some of the government owned names like ONGC, NTPC are trading multi-year low valuations. We look at this as an opportunity for active equity investors. Mispricing does come up and this is a chance to align our portfolio to where we think mispricing is significant and once some of these cyclical pressures on the economy normalises, some of the stocks which are mispriced could give fantastic returns. We are on the lookout for opportunities like this.

We are continuously looking at different parts of the market. Incrementally over the last few weeks, some of our time has gone towards looking at consumer discretionary sector, the automobile sector where stocks have corrected quite a bit. I am not saying that stocks have become cheap now but it has come to more interesting levels. If the cyclical upturn comes in a couple of years, good quality companies which have the moat around their business model could have earnings which are much more than current levels. So I think opportunities are arising there.

When there is nervousness that we may actually see a further fall and further weakness. The broader markets of course, are in clear bear territory right now and have been for a while. Even if you are looking from an annual point of view, where do you see fair valuation currently for the index?
See it is very difficult to give an index return estimate like that, We are stock pickers and not the index. The headline number could be very different from stocks which are different. I would refrain from giving a return estimate going forward but compared to let us say a year and a half ago, while most stocks were building in a very blue sky scenario, a high growth and high multiples play, some of it has corrected. If the scenario of cyclical downturn that has changed in a couple of years, the base case is not that India is structurally going to grow slower. Rather, this is a cyclical downturn which will take time to correct and once the correction happens and earnings pick up, a lot of companies can give much better profit growth going forward.

What kind of earnings growth are you expecting? Can we see an incremental pickup when it comes to earnings?
Again, it is very different for different sectors. The private sector banks are probably in a better position now in terms of visibility of earnings given that some of them have lower issues on asset quality and they continue to gain market share in the loan segment and overall market.

The visibility of earnings for private sector banks continues pretty strong as it used to be. For the consumer discretionary sectors, I have seen a slew of earnings cuts over the last few weeks but still a bit of optimism has been built in for the second half. There is a base effect which will come in as we go ahead but ultimately you need the economy to pick up and if the optimism is not reflected in numbers, there could be further earnings downgrades in the near term.

But again, it is very difficult to predict earnings on a near or short term basis, the volatility could be there based on how things move around but we would rather look beyond the next few months and see where companies can deliver good earnings over the next three or four years.

What is the sense on India, right now post some of the tax concerns? Has the interest waned a bit? Secondly, coming to global dynamics, what is the likely impact that we might see here given that there is still a lot of uncertainty on trade wars and the Fed fronts?
In the last couple of months, there has been being some foreign funds outflows -- some called these massive outflows -- but to take a step back for 2019 calendar year, we are still fairly decent positive inflows from the foreign investors. The last two months outflows could be because of various reasons. The valuations probably are fuller after the elections. Maybe there is a set of investors who worry about taxation change. So it is not one broad brush which can paint reasons across all investors. There are multiple concerns which have come out in terms of the economy slowing down and maybe some investors have got worried about that and hence more money is going to other emerging market countries.

But to speak from our perspective, we have not seen any outflow from Pictet India Fund. We are remaining invested and my colleagues who manage the Asia fund also remained overweight on India throughout this period. So from our perspective we continue to look for stock specific opportunities and we look for this slowdown as a chance to buy some of these good companies at much better valuations.

Your second question was more on global impact of what is happening around the world. Again, different elements can impact flow of money into India but to name one or two, obviously what is happening with the Fed rate and what is happening with the expectation of the Fed rate cuts. And secondly, a general global risk-on or risk-off environment. Over the last few weeks, there has been a sudden risk off so you would have noticed money moving towards safer assets like gold or maybe the government securities. Most emerging markets, not just India, saw outflows in August. A global risk-off environment of course would be a bad scenario for most emerging markets assets.

We are already brittle, what can break us is if something awry had to happen with the global markets. Just looking at the way the yield curve has been moving, it really is a big fear as to when the big two -- UK and US going to face recession. Is that a legit worry you think?
It definitely is worrying for overall sentiment. It is worrying for market for money to flow out. But ultimately it has to reflect in the earnings and growth of companies. In Indian market and Indian companies, a large part of the market is reasonably insulated from what is happening in the US. It is a largely domestic driven economy. You could argue that the tech sector in India has got a fair amount of exposure to what is happening in the US and that could call for some sort of downgrades on the tech earnings because US itself is a large contributor to tech earnings. But still, a good part of Indian economy should remain insulated from that and ultimately the earnings of these companies should not be impacted so much.

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