Mr. Nimesh Chandan is a Senior Fund Manager (Equities) at Canara Robeco Mutual Fund. He manages Canara Robeco Diversified Equity Fund, Canara Robeco Balance, Canara Robeco Emerging Equities, Canara Robeco Nifty Index, Canara Robeco CIGO.
He graduated with a Masters in Management Studies from SIMSR and has over 8 years of fund management and research experience. Prior to joining Canara Robeco Mutual fund, he has worked with Darashaw & Co., Birla Sunlife AMC and SBI MF. His last assignment was as a Senior Fund Manager (Equities) at ICICI Prudential AMC.
In an exclusive interview with Personal FN, Mr. Chandan shared his views on equity markets and the investment philosophy at Canara Robeco Mutual Fund. The interview was conducted on October 21, 2009.
Personal FN:The question that everyone is asking today is whether the global economy is out of the woods, what is your take on that?
Mr. Chandan: "Definitely the worst seems to be behind us. The kind of crisis we went through last year is something that happens once in many decades. Unfortunately, lately a lot of people are of the opinion that the recovery will be very quick. We at Canara Robeco believe that it may take sometime for the global economy to really get back on its feet. India is still very uniquely positioned; a kind of oasis in the desert, where we did not suffer much and our growth continues to be quite strong. I think growth of 6.5% last year, when the whole world was in a reverse gear, was a good pace. I think this year we’ll accelerate on that. We are primarily driven by our domestic demand which gives resilience to our economy. There are sectors like the export sectors which are affected, but the underlying economy which is based on Indian consumption and Indian infrastructure is still doing very well and hopefully we’ll continue to do better than the world for the next many years."
Personal FN:Do you think fundamentals have improved to justify the upward movement of stock markets or is it more driven by liquidity? Mr. Chandan: "
The fundamental point of view, which we take, is that the economy is growing, companies’ earnings are growing, so corporate India is registering good sales growth as well as earnings growth and the market is following that. Therefore it’s a pure bull market rally where people are confident about the economy and corporate sector doing better.
There are chances where markets may go into a bubble zone or go into a trough based on liquidity. Investors should take that as an opportunity. Last year a lot of companies were available at abysmally low valuations, much lower than the fundamental fair price, so those were the times to actually invest and pick up those companies. Fortunately, in our funds we have done that.
Now the global economy is flush with liquidity as the government and central banks have put in effort to get their economy back on its feet, to get the credit markets unfrozen. This is reflected in the asset price which are already doing well to an extent now. We believe, inflation concerns will come in and then liquidity can slow down. Hence, we believe we will see a correction in the near term.
Fundamentally, we are still positive as long as earnings growth is there in the economy. Indian Equity markets will give good returns to investors over a long term. Liquidity can move in and out very swiftly creating opportunities to buy or sell. Currently, we are going into a more defensive stance. We expect the market to take a small correction, it’s been a beautiful ride from 8,000 to 17,000, may be markets will take a pause from here.
Investors should look at some of the drivers again – what is the pace of the earnings growth, how much has the government delivered in terms of political changes, the initiatives that they had promised - reassess the situation and then move ahead, so this period could be a period of correction and could be a period of flattish movement in the market".
Personal FN: What in your view could be the challenges or any concerns immediate or near term?
Mr. Chandan: "The primary concern we have is inflation. The agricultural growth is expected to be muted or negative this year, which would fuel the food prices. Because of liquidity in the system, a lot of assets like global commodities or crude have rallied. That could start showing its effects on the inflation numbers.
Over a longer term, I feel India has great story in its domestic demand and consumption. Demographics are strongly in our favour - about 50% of the population is below the age of 30 – that’s a strong point for India. If we are able to use this population optimally, in terms of creating jobs, whether in infrastructure sector, outsourcing, or banking/financial services, we’ll be able to see a rise in India’s per capita income. This will be reflected in the growth of corporate sector too.
These are the two things we have to be conscious of – one is inflation and the other is job creation".
Personal FN: What is your view on different sectors like telecom, technology, banking among others?
Mr. Chandan:" In our portfolio, we are playing two themes, one is where we are looking at Indian consumers and we believe that as India grows, consumption led demand will create opportunities for investments. Second theme is that we are negative on the pace of global pickup. We feel that the global recovery will be a little slower. So thereby the bias is more towards stories which are in the domestic consumption. Sectors like telecom, financial services – everything fits there.
On the other side, we are negative on the global trend for sectors like technology and metals. In technology we have some niche players where the growth trend can be far better than that of the large players, so we have invested in those niche players. We are not bullish on the overall pharmaceutical sector, but there are sub-segments under that such as contract research and manufacturing services and we are bullish on that.
Within telecom, India is still at 40-42% penetration in terms of mobile services. This is expected to grow. The recent price wars will impact the new players that are coming in. We are in favour of the incumbents in the sector. This is a year where you will actually see strong cash flows coming in from existing customer base of these telecom companies and so we want to be with companies that have strong cash flows, attractive valuations and visible growth for the next few years. That’s how we have designed the portfolio.
Overall we are growth investors. In India fortunately we have good growth companies available at good valuation too but our bias is towards buying companies that have strong growth".
Personal FN: What is the investment philosophy at Canara Robeco?
Mr. Chandan: "Our investment philosophy is to buy robust businesses at reasonable price. The robust business can be broken down into - first, the strength of its business model and second, the management of the company. We screen every investment through these three filters, it starts with how good the business model is, how good the management is and then the valuations. We don’t buy companies just because they are trading very cheap or the cheapest available stock in a sector. We actually give more weightage to a good business model, because many of these companies that are trading at a cheap valuation may remain cheap or may be cheap for a certain reason. We are also very conscious of companies with good managements, which can be reflected in their growth rates, corporate governance and social initiatives".
Personal FN:What is the difference between the two funds – Canara Robeco Diversified Equity Fund and Canara Robeco F.O.R.C.E. Fund?
Mr. Chandan:"We believe there are basically three engines of growth or themes in India which is outsourcing, infrastructure and consumption. The Canara Robeco Diversified Equity Fund actually plays all these three themes, but with a certain cap on each of them. It’s a large cap diversified fund which is predominantly benchmarked with the BSE 200 and does not take too much risk in one theme. Canara Robeco F.O.R.C.E. is for investors who want to participate only on the consumption side. To play the full extent of all large, mid and small caps within consumption, we have the F.O.R.C.E".
Personal FN:In the last rally before 2008, everybody was talking about oil. What’s your view on oil?
Mr. Chandan: "Our in-house view on oil is negative. We don’t feel this is a very strong demand-led rally. Petrochemicals and oil refinery margins are under pressure, leading us to believe that there is definitely a much faster run-up in oil prices than the pick-up in demand. Hence we believe this can cap the oil prices for sometime.
The other is because of the dollar weakening; you have seen a rally in some of the commodities. We believe this is reflected in oil also. So, at this point in time, we are not very optimistic on oil prices going up. If the dollar actually depreciates much faster than what it is doing right now, then we may see oil in dollar terms going up. We will have to see what rupee does vis-à-vis the dollar, and then probably decide what impact it can have on the Indian economy.
Today, inflation concerns are coming in India because of food as well as global commodity prices. We believe food inflation is a much bigger threat today. If rupee appreciates, some of the commodity rally can be absorbed. Also, today we are at a very low inflation. That base will start showing by next year. By March, inflation can be in high single digits, or may be even in double digits. That is a concern for us".
Personal FN:What is your view on gold?
Mr. Chandan: "From market participant I gather that gold, rather than being a kind of a hedge against the dollar, is now becoming an asset class on its own. A lot of people are positive on gold. We don’t have a particular view as such on gold and nowhere can it reflect in our portfolio. Our view is yes, over a longer term the dollar will go down, it will depreciate. That should also lead to gold as well as rupee appreciating. We have to take that into account specifically for planning our sector exposures".
Personal FN: What should be the strategy for an investor, who is sitting on lot of profits? Should he book profits or redeem his mutual fund investments?
Mr. Chandan: "Each individual has a different goal. Some people want absolute returns, some people want returns better than some other asset that they have invested in, some people want to outperform the market. So people have different needs and different returns expectation. So there is no one solution for it.
I generally advocate an SIP (Systematic Investment Plan) for retail investors. I think it is the best way of investing. People who want to time the market, by now, would have realised that markets can move swiftly, giving you no time to react. So, in a systematic way, whether you do it on an index level, or on a monthly time-based level, a Systematic Investment Plan is the best advice anyone can give. A lot of investors in the world as well as mathematicians have given a thumbs-up to this style of investing.
The other thing I would advise people is to control their greed as well as fear, not use tools like derivatives if you don’t understand them, and don’t leverage. It always happens that the retail investor comes in at the end of the rally, may be we should look at changing that now. Start an SIP, or at least don’t jump into the crowd just because the market is moving up. People who are doing their own investments, I would encourage them to do their thorough research before investing in stocks".