Fund managers optimistic about Indian equities but cautious of risks
Noriko Kuroki, Client Portfolio Manager at JPMorgan Asset Management, has pared her exposure to Indian equities in recent weeks as the stock markets surged following the landslide victory of the Narendra Modi-led Bharatiya Janata Party in the Lok Sabha polls. Kuroki, who manages $50 billion in assets as the head of emerging-market equities, now allocates seven per cent of her portfolio to Indian equities from 9.5 per cent a couple of months ago. Why did she lower her bets? "India is no more a cheap market. It may not be expensive but at these levels it is not a value proposition," she says. "The market has rallied on hopes that growth will come back, but it is yet to be seen if the government delivers."
Still, Kuroki is positive on India and feels that any reduction in bureaucratic red tape, a focus on increasing foreign direct investment and improving infrastructure will be positive signals for investors. Another fund manager who, like Kuroki, is optimistic but has turned a little cautious, is Tushar Pradhan. "The best has yet to come, so it is better to stay invested," says the Chief Investment Officer at HSBC Mutual Fund. He adds that high inflation and the twin deficits - fiscal and current account - could pose threats to Indian equities.
This cautious optimism is reflected in the sixth edition of the Business Today Morningstar Asset Allocation Survey of fund managers. The survey showed 26 per cent fund managers fear inflation to be a key risk for the market while 16 per cent expect the twin deficits to be cause for concern. Nearly a third fear that deficit monsoon rainfall could hurt stock markets.
The bullish sentiment is not limited to large-cap stocks that comprise the Sensex. The survey shows that 25 per cent fund managers are willing to invest more than half of their portfolio in mid- and small-cap stocks, compared with nil in the previous round. Also, 58 per cent respondents say they would like to bet on growth stocks, while the remaining fund managers want to invest in value stocks. A vast majority (92 per cent) expects a pick-up in stake sales in state-run companies. Not surprising, then, that 82 per cent fund managers would like to invest in state-run companies.
Despite the Sensex's recent gains, valuations seem compelling to fund managers. Almost two-thirds of those polled expect the index's price-to-earnings ratio, an indicator used for valuing stocks, to hover between 16 and 18 times forward earnings over the next six months. In the previous survey, only 25 per cent predicted the same range for the PE ratio. Mahesh Patil, Co-Chief Investment Officer at Birla Sun Life Mutual Fund, says that in the past two to three years valuations were being looked from a one-year perspective. "Now that the new government is stable, the market is valuing for a longer time, like three to five years. So even though there is no change on the ground, there are expectations. Also, we are hitting the bottom of the economic cycle, so barring any black swan from international markets, we are witnessing the start of the investment cycle," he says.
The survey also shows that fund managers expect the economic situation to improve. Unlike the last survey, this time no fund manager expects growth in gross domestic product (GDP) to be below five per cent with a one-year horizon. While 58 per cent fund managers expect GDP growth to be in a range of five per cent to 5.5 per cent, the remaining respondents see the economy expanding between 5.5 per cent and six per cent.
With inflation remaining a concern, fund managers do not expect the Reserve Bank of India (RBI) to sharply cut interest rates. Nearly three-fourths of the respondents expect the repo rate - at which banks borrow from the RBI - to be in a range of 7.5 per cent to eight per cent. But the good news is that, in the next one year, 83 per cent of those polled predict that interest rates would start falling, versus 64 per cent in the previous survey.
Fund managers also believe inflation will cool off in the coming year. Of those polled, no one sees inflation based on the wholesale price index (WPI) above six per cent. While 60 per cent fund managers expect inflation to be between five and six per cent, the remaining see the price level at four to five per cent. Likewise, 55 per cent see the consumer price index (CPI) between seven per cent and eight per cent. WPI inflation accelerated to 6.01 per cent in May from 5.20 per cent in April, but CPI inflation eased to 8.28 per cent from 8.59 per cent.
The survey also shows more fund managers expect the rupee to appreciate in next one year. No fund manager expects the rupee to fall below 62 versus the dollar and no one expects it to rise above 56. More than a quarter of the respondents expect the local currency to be in a range of 60 to 62 versus the dollar. Thirty-six per cent expect the rupee to strengthen and hover between 58 and 60, and an equal number of fund managers predict a range of 56-58 in the coming year. The rupee is currently trading around 60 versus the dollar. Meanwhile, the ongoing tension in Iraq has led to more fund managers expecting crude oil prices to surge. Eighty per cent respondents felt oil prices will hover between $100 and $110 a barrel, but no one expects prices to rise beyond $120 a barrel.
