Equity market to see sharp correction, don't get scared: PVK Mohan

The equity market has been soaring since during recent days. The question though is for how long it can sustain the rally without meaningful policy changes. In an interview to MONEY TODAY, PVK Mohan, head of equity, Principal Mutual Fund, says that equity markets would see sharp corrections as the quarterly results start coming. However, he feels investors can expect 15-20 per cent return in next three years.

Q. What has been investors' mood after formation of the new government?

A. We are getting some inflows. There's no rush as such but we see a trickle-in. It is positive that there is a new government with a clear mandate, and hopefully it would be more decisive in policymaking. However, the more important thing is that the charm of physical assets is dying down. That's good news for the equity market.

Everybody wanted to own gold, but there is lesser talk about gold now. Real estate is no more the kind of multi-bagger it used to be. People have realised even real estate prices can correct. They have also seen how some builders have gone belly-up.

Recently, some bankers talked to the finance ministry to incentivise financial savings. It is to be seen what the government does to channelise savings into financial instruments.

Q. What should the government do to incentivise financial savings?

A. The previous government started the Rajiv Gandhi Equity Savings Scheme (RGESS). Probably something like that would continue. It is also time to allocate some pension money into equities.

Q. What's your budget wishlist?

A. The wishlist is to get money into equity markets. One way to do so is increase the Section 80C limit from Rs 1 lakh to maybe Rs 2 lakh.

The bigger thing we expect is that the government delivers.. If it (the government) provides good governance and growth, money will automatically come into the equity market.

Q. What are the reforms that you think the government should immediately undertake?

A. The immediate priority should be to bring GST (goods and services tax). That will be a big game-changer. That will enhance growth, efficiency and add to GDP.

Given the row over retrospective tax, I think the government should lay down a clear and transparent tax regime, make doing business easier and cut down layer of bureaucracy in near-term.

At the sector level, you need to clear the mess in the energy sector. This means getting Coal India to produce more coal, weather it means allowing more mining or private miners. They should have a clear formula, structure or roadmap for fuel pricing and predictable, transparent policy framework for environmental clearance.

Q. What are the immediate risks to the equity markets?

A. The expectation is very high. Any slip between the expectation and delivery will be negative. For example, if in the budget, there are no big bang announcements, market will take it negatively.

The effect of El Nino on Monsoon would lead to increase in prices of cereals, oil seeds and increase inflationary pressure. This will further limit the RBI's scope of rate cut. Globally, situations in Iraq, Ukraine may lead to increase in global commodity prices.

But locally, the major risk is that the stock prices, especially that of high-beta stocks, have gone up sharply. And the (quarterly) results, which are a reality check, will not be very good in the near term.

Practically, we have to give the government 2-3 years for any meaningful change to be visible. But as long as intent is there, benefits will come in couple of years.

Q. How do you think fund managers will approach this market knowing that the stocks have run-up sharply?

A. While there are expectations, we are saying that come with a horizon of 2-3 years. Because of the stable government, we see this as an opportunity for something meaningful to happen in terms of economy and growth. So, stay with a longer-term conviction, and in 3-4 years you may double your money. That's the potential today.

From portfolio point of view, we are not chasing stocks at any price. Market does give you opportunities. I have seen cycles after cycles. We believe in buying good growth stories but at what price you buy is also very important. Not chasing stocks at any price but buying them at reasonable price is the key. At these levels, keeping that discipline and not getting carried away by the hype in the near term is very important.

We went underweight on consumer staples long time ago purely because of concerns on valuations, we were overweight on pharmaceuticals till four-six months ago. Gradually, our pharma exposure has come down from double-digit to single digit. This has happened because we do not find value in the sector any more. So, we are underweight on consumers, pharma and IT sectors, but we are not rushing to buy any stocks at any price.

As fund managers, we are also trying to get some of the mega trends-which sectors would do well if reforms (as promised) are carried out by the government. Let's say if the government talks big about irrigation, which companies would benefit, or if it goes big on tourism which companies/sectors would benefit. A lot of our time is going into capturing these trends.

We see balance sheet repairing happening in a lot of companies, mostly in infrastructure and construction companies. These are typically debt laden, asset-heavy companies. For example, we own a micro-irrigation company, which once upon a time had huge receivables, as high as its sales. Now, it's coming down. If it comes down further in 2-3 years, the free cash flow will increase and the company's ability to retire debt would increase. So, in two years the company's debt-equity ratio can come down from 2.5:1 to 1:1. These are the kind of balance sheet repairing we see in the next two-three years.

Q. What's your advice to investors?

A. First, there would be volatility and very sharp corrections. Don't get scared of corrections. Those are your opportunity to enter the market. Second, come in the market with a 2-3 years time horizon and expect 15-20 per cent annual return in the next few years.

Equity as an asset class must make a comeback in India. FIIs are holding 40-45 per cent of the free float, why not Indian investors have the same confidence in domestic companies.

Q. As a fund house, what is your strategy to gain from the current market sentiments?

A. We haven't been very active on NFOs (new fund offers). The whole focus in the last two-three of years has been to bring consistency in the performance of our existing funds, try and be in the top quartile on a consistence basis. We have shrunk our funds into three broad categories-large-cap, mid-cap and diversified strategy.

This has taken a lot of our efforts. The last three years business has been bad, no one was investing in mutual funds. So, we were trying to get our structure of people, strategy and performance right.