PersonalFN: Do you think that the present market conditions are conducive enough for the mutual fund industry to do well, and in your view is it still a blue-sky business?
Mr. Apoorva Shah: Yes. Today, although the savings rate of our nation is about 30% of our GDP, the allocation to the mutual fund industry is hardly 3%. So, there is consensus among market participants that there is an enormous potential of the mutual fund industry. Additionally, retail investors have not been happy with the foreign money-flow pattern, which has become very erratic and resulted in ups and downs. Although equity schemes have given good returns during this time, retail investors have become more cautious. Furthermore, currently, it appears that the fascination for gold is abating while property prices are becoming unaffordable. As such, future investments in these two asset classes may be substituted by investment in mutual funds. Thus, going forward the flow to funds should increase and improve the outlook for the mutual fund industry.
PersonalFN: How do you see the present situation in the developed economies and its impact on the Indian equity markets?
Mr. Apoorva Shah: Whatever happens in the developed economies will determine our fate, especially in an environment where we are unable to influence our own well being due to the current state of the political economy. We are dependent on external conditions to improve such as oil prices to fall or money flow to resume for our well-being.
For this, structural reform in Europe is necessary as the efficacy of QEs (money printing) is questionable. Germany has got to integrate itself with the rest of Europe. Because, as a single nation, (with all the blocs uniting), the Euro-zone will have a reasonably better future outlook. The current problem in the Euro-zone is the result of a clash between an ultra-rich country like Germany and under productive and debt-laden block like the PIGS countries. Hopefully by 2013-14, some of these problems will be solved in a sustainable manner. By then the U.S., which is showing initial signs of recovery, will have a new President and be in a better position to resolve its own fiscal challenges. So all of this is going to be positive, but it might take one more year.
PersonalFN: What is your view about China, since their economy too has faced a slowdown? Could they derail the whole global economy if things get worse –and would they indeed do that?
Mr. Apoorva Shah: China is heavily dependent on the Western economies; it will be very difficult for it to delink itself from the global economy, if things get worse. Without the global markets’ demand, China would face issues of employment, bad-debts etc.
Many fund managers are also betting on other emerging market countries such as Brazil Russia, Indonesia – ahead of India; do you think that’s appropriate?
Mr. Apoorva Shah: As I am not an expert on other countries, I would not like to comment. However, it is only natural that from time to time there will be attraction away from one market to another. The slowdown in China may be a turning point for India which may benefit from lower commodity inflation.
PersonalFN: But do you think, India would be more driven by global market events happening?
Mr. Apoorva Shah: Both global and domestic events may be responsible for the way markets are going to behave. The global slowdown may bring down inflation of commodities; India too needs to move on the policy front to encash this benefit more sustainably.
PersonalFN: On the domestic front what according to you is the biggest threat for economy – inflation, fiscal deficit, slumping GDP growth rate, policy paralysis… what is it? What according to you can shake the markets and make sentiments really nervous?
Mr. Apoorva Shah: The current account deficit and fiscal deficit are interlinked. High fiscal deficit is leading to extra purchasing power with our people, which is resulting in higher imports as well – whether it is oil, gold or luxury items. This creates pressure on our foreign exchange at a time when we are not sure whether we’ll be able to bridge the gap with foreign capital; because the foreign capital is itself scarce now.
Additionally, with European banks trying to deleverage, they are not putting in a lot of resources into our markets. Although we do see these flows coming in from time to time, the outlook on them is not very clear. So that combination of lack of global flows to support our current account deficit, which is driven by high fiscal deficit, which in turn is driven by populist policy or socialist agenda; is where the problem is.
PersonalFN: Do you think the fall in Indian rupee overdone, and are the fundamentals as bad as perceived by the market? Do you see 53-55 range as the new normal range for INR?
Mr. Apoorva Shah: Yes. A range of 53-55 takes into account a long period of a high current account deficit. The Indian rupees weakness against the USD is an equilibrium finding process. This tries to encourage a slowdown in imports and more exports or inflows. However, the fluctuations in the currency will be dependent on how the global crisis shapes-up.
PersonalFN: So given that, do you think the RBI has done enough to contain the upside risk to the Indian rupee, and now cuts are possible to provide an impetus to economic growth?
Mr. Apoorva Shah: In the near term, I don’t think the RBI is going to cut rates to provide an impetus to economic growth. Due to the poor monsoon we are experiencing, headline inflation may trend higher due to higher food inflation.
PersonalFN: When do you think the markets would take decisive turn – whether upside or downside?
Mr. Apoorva Shah: That is difficult to say. Today the market is volatile because there are various bull factors and bear factors at play from time to time. In my view, when the Euro-zone crisis reaches a resolution, we will have a clearer view on where the markets are trending. Germany will need to play a role of an integrator (i.e. fiscally unite Europe), whereby there is a common budgeting process for these countries and a central taxation policy.
PersonalFN: What according to you would be the range for the market, for the financial year 2012-13, on forward earning multiple basis?
Mr. Apoorva Shah: The forward earning multiple is 14 times and I feel that it is a fully priced market. Given the slowdown and lack of aggressive rate cuts, the market may go to a lower range.
PersonalFN: Many of your equity funds have exposure to midcaps, and now since the markets are likely to have a downside, what is the risk managed strategy which you are adopting?
Mr. Apoorva Shah: We diversify our portfolios while investing in quality companies, which we believe have strong business fundamentals. It is important that the management exhibits the ability to execute with strategic vision and integrity. We have 50% of our portfolio in large caps, in our Equity fund.
PersonalFN: You tend to churn your portfolio quite a lot – your portfolio turnover ratio across is quite high. So what’s your view on that?
Mr. Apoorva Shah: In our large cap fund, we have a higher turnover ratio. While we have a core portfolio that is unchanged, the incremental news flow on various stocks and sectors can mean that money can move from one stock to the other, and we take advantage of that. In the case of midcaps, we wait for long-term growth.
PersonalFN: Any particular sector which you are overweight on – which are very bullish, and that looks attractive to you?
Mr. Apoorva Shah: In India, many sectors have the potential to grow, particularly Infrastructure. It is a sector which has a short supply and therefore companies in the sector will give a decent return. However, the major risk to the sector is the reforms on policies. But we think these problems will be rectified going forward which will result in good returns.
The pharmaceutical sector is also positioned to do well as it has a natural advantage in India in terms of trade and the skill base. Although there remains the risk of Government regulations, the sector still continues to show promising potential.
The banking sector could also see growth. Though urban markets are saturated, the rural markets are open for growth and continue to grow rapidly. As such, banks are expanding in the rural markets. Banks that would do this well will see good growth. Additionally, there are many banks that are growing from a smaller base but have strong management teams. If these banks are able to penetrate the market and increase their market share, they will be attractive investment opportunities. Lastly, the agricultural sector is positioned to perform well in the long term.
PersonalFN: What would be your advice to Indian equity investors – especially the retail investors, whose participation is at a multi-year low?
Mr. Apoorva Shah: In the current market environment, investors should have exposure to equities. They should consider systematic investments to benefit from the volatility. Allocating too much to one asset or commodity, be it gold, real estate, and fixed income, may not fetch you the best returns. In the current scenario, equity which is under-invested, should give fair returns in the long term. So, moderate investment with a systematic investment approach is required
PersonalFN: Finally from an asset allocation point of view for investors, what according to you will be the ideal asset allocation between equity, debt, gold and real estate, which you will recommend to investors?
Mr. Apoorva Shah: Investors should allocate their assets based on their risk appetite which depends on many personal factors including age and financial circumstances.
PersonalFN: Mr. Shah, many thanks for your valuable time and insights. We are sure our readers will benefit from your views.
About Mr Apoorva Shah: Mr Apoorva Shah joined DSP BlackRock Investment Managers Pvt. Ltd. (previously called DSP Merrill Lynch Fund Managers) in April 2006. He previously held senior positions in the Global Private Client and Institutional Equity Sales divisions of DSP Merrill Lynch Ltd. Apoorva has a Post Graduate Diploma in Management (PGDM) from the Indian Institute of Management (IIM), Ahmedabad, and brings with him over 18 years of experience in banking and investment.
Mr Shah manages:
DSP BlackRock Opportunities Fund
DSP BlackRock India T.I.G.E.R. Fund
DSP BlackRock Small & Mid Cap Fund
DSP BlackRock Tax Saver Fund
DSP BlackRock Focus 25 Fund
Disclaimer: The views expressed in this interview are those of the interviewee only. PersonalFN and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this interview. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. PersonalFN does not warrant completeness or accuracy of any information published in this interview. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the readers. Please read the detailed Terms of Use of the web site.