Tapering of the quantitative easing policy by the US Federal Reserve has been a bugbear for the emerging markets. As the Indian investor would verify, it has been like a sword hanging over the economy since tapering had the power to reverse fund flows. The effect has been seen in the tumultuous state of the markets and the rupee in 2013. But just as the country was learning to grapple with this America-born demon, there is the prospect of another more local event that the markets now both dread and anticipate: The Lok Sabha elections in 2014.
Not surprisingly, these issues were enough to fuel a passionate debate among three leading fund managers—Anoop Bhaskar, head of equity, UTI MF; Chandresh Nigam, MD & CEO, Axis MF; and Mrinal Singh, fund manager, ICICI Prudential MF. Moderated by Ramesh Damani, a member of BSE and an individual investor, along with Sanjoy Bhattacharyya, our consulting editor, the hour-and-a-half long discussion was peppered with views on preferred asset classes, sectors and the Dow-versus-Dalal Street debate. Like true equity fund managers, they gave a thumbs down to gold and real estate but were happy to root for long term gilts or fixed income.
Interestingly, this conversation took place on the afternoon of December 18, 2013, where these fund managers were emphatic that tapering would not really matter. On the same night, we learned that it was being made effective but it was going to be a slow moving programme. Just as our experts had predicted, our markets did not even groan.
This, along with many other insights on what will work or not work for 2014, make for invaluable advice on how to build a successful portfolio in the coming months. Some excerpts:
Ramesh Damani: Charles Dickens used to say ‘it was the best of times and the worst of times’. And what a year 2013 was for India. The Sensex was volatile in September and then rose like a phoenix, creating a new lifetime high. Indian retail soared and then international investors kept on buying. Is it going to be QE, GE, NaMo, AAP, NREGA or CPI? Which acronym will move the markets in 2014? Three of India’s best fund managers will tell us how 2014 will shape up for Indian equities. First question to Anoop: What were the lessons from the recent rupee crisis?
Anoop Bhaskar: One, to focus on the inflation of India versus that of the US. If you have inflation of 8-9 percent for three years in India and 2 percent in the US, at some point you will have currency adjustment. Second, when panic sets in, people start looking at the worst things which were always there. It’s not that fiscal deficit was at 2 percent two years ago and suddenly it has gone up, or that CAD was at 5 percent. The government was trying to show some kind of governance, which was not perceived well by investors; it just led to the whole situation going out of hand for a few weeks.
Chandresh Nigam: From an investor’s perspective, it reminds you that what you seek out in an environment is some degree of macroeconomic stability. Sometimes the market lulls you into thinking everything is fine, but the [poor] numbers have always been there. We talked about CAD two years ago. The fact that the economy was at a 6-7 percent GDP growth and the currency was stable was clouding the instability of poor macro numbers.
Mrinal Singh: Beyond a point, you cannot have growth unless you invest. And, for some reason, investment did lag. Fiscal deficit can only be justified as long as you are investing for future growth. If you are not doing that, in some form, it is going to blow up in your face. It did in the form of currency because we were still growing and consuming, and consumption was getting driven by imports; beyond a point, we couldn’t afford it – we hadn’t invested enough for us to be able to supplement the demand from domestic production, which hit us. The currency had to reflect that. In the meantime, QE helped elongate that phase a bit because there was a cheap dollar floating around; we started talking about that getting withdrawn—and we saw what happened.
RD: Have we addressed the underlying problems?
MS: The crisis didn’t happen—people started talking about it. They just mentioned the word taper—they didn’t taper. Interestingly, at that point, we had a G20 meet in St Petersburg where everybody from the emerging world begged them (the US) to be more accommodative about the impact and (Barack) Obama relented because it was coinciding with the Syrian crisis at that point. We had all kinds of currencies under pressure. We are luckily a floating currency. Imagine a situation with a small economy and a fixed currency—we would have seen someone completely blown out.
RD: It’s called Cyprus! Are you still worried? Is the market faking a new high?
MS: It took the inertia of complacency away. People got shaken up. They realised they needed to be better prepared. After that, a new RBI governor has come, [there has been] accumulation of FX (foreign exchange) reserves, he’s talked about a “bullet proof balance sheet” and that the taper is going to happen—it’s only a matter of time. The numbers were there on the face of it—just the market wasn’t responding to it. We are better prepared.
Do I view tapering negatively? The answer is no. The genesis of tapering is that growth is returning to the developed world, which is a very good sign. What has the cheap money benefited? Predominantly physical assets: Commodities, gold, real estate, followed by artificial yields in the global bond markets, and then by equities. In my assessment, the pecking order is the same and this is the same order in which assets will have to readjust now. I am not saying tapering won’t affect equities but the impact on physical assets will be a lot more, followed by a reality [check] in the global bond markets.
RD: Other than tapering, the national election is going to be a huge event. What outcome is the market rooting for?
RD: That’s far away. Are we talking about a 20 percent move up?
There will always be demand for two-wheelers – people will not shift to a three- or four-wheeler without buying a two-wheeler. Also, the kind of interest rates we have support only two-wheelers. We won’t be a 15-million car market in five years because we don’t have the roads. And two-wheelers are used for business: People need them to earn a living. It is not a luxury or status item like a car. In fact, everyone fears Honda will be 95 percent of India’s market in five years.
AB: We’ve not made any money on cement for the last three years, so that’s the last sector I’d look at.
(This story appears in the 24 January, 2014 issue of Forbes India. To visit our Archives, click here.)
NSE Market indices may touch 6000 by this month. Future prospects are in darkeness. Investors are waiting eagerly a new,strong Govt. But this is in doll-drum. Any way too much depoendence to foreign markets, especially big brother-USA, we have had bitter experiences. We must chose experts from all parties, while taking national policies, financial, social, foreign etc. We can flourish and cherish by this.
on May 8, 2014