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Smiling through the gloom

In the third edition of the survey, nearly half of all fund managers expect the Sensex to hover between 18,000 and 20,000.
twitter-logo Mahesh Nayak        Print Edition: Oct 13, 2013
Smiling through the gloom
Photo: Reuters

At the beginning of this year, Mrinal Singh, Fund Manager at ICICI Prudential Mutual Fund, was bearish on Indian equities. Not any more. Today he is considering doubling his equity allocation.

"Equities have corrected, and attractive valuations are purely the reason for me to turn positive," he says. "From a 20-25 per cent equity allocation, I would have 50 per cent invested in equities, with the remaining 30 per cent in debt and 20 per cent in other asset classes such as real estate and gold."

PARTICIPATING MUTUAL FUND HOUSES

1 Baroda Pioneer
2 Birla SunLife
3 BNP Paribas
4 Canara Robeco
5 DSP Blackrock
6 HDFC
7 HSBC
8 ICICI Prudential
9 Indiabulls
10 ING
11 Peerless
12 Quantum
13 Taurus
14 UTI
He is betting on sectors such as banking, auto ancillaries and infrastructure. "If you are betting on India's growth, these sectors must perform, otherwise it makes no sense to invest in the markets," he says. Like most fund managers, Singh says he believes the government is still pushing for reform and trying to bring the battered Indian economy back on track, belated as the efforts may be.

Jaideep Bhattacharya, Managing Director at Baroda Pioneer Mutual Fund, has increased his fund's exposure to equities from 50 per cent to 65 per cent, and added overseas equity funds to its list. Over the next year, 71 per cent of fund managers who responded to the third BTMorningstar Asset Allocation Survey see the US as the market most favoured by institutional investors globally.

"Though uncertainty remains, and the Indian market will be driven more by events, there are fewer options for investment," says Bhattacharya. "With consumer price inflation in double digits, investing in equities can help." Like 46 per cent of fund managers surveyed, he expects the Sensex to move between 18,000 and 20,000 over the next year.

The mood is not bullish, but it's not negative, either. Three months ago, there was guarded optimism amid the gloom on the street, and now the fog seems to have cleared a little. Sandeep Shenoy, Executive Director -Institutional Equities at Anand Rathi Securities, told Business Today recently: "Most of the bad news - even the tapering of the QE - is factored into the price, and things look much better than before. But will I be a buyer across the board? The answer is no. I will stick to value and pick stocks of companies that are generating positive cash flows." He was speaking shortly before September 18, when the US Federal Reserve announced that it would delay a tapering of its quantitative easing policy, aimed at supporting the economy. The Fed's decision lifted markets worldwide.

"Though the mood among fund managers remains positive, overall sentiment in the market is still negative," says Singh of ICICI Prudential. This is why, with a one-year horizon, 46 per cent of the fund managers surveyed see the Sensex's price-to-earnings (P/E) ratio falling below 14 times the forward earnings. In the second survey (see Business Today edition dated July 21, 2013), 92 per cent of fund managers saw the Sensex's P/E ratio at 14 to 18 times forward earnings. Fund managers also favoured large-cap stocks over mid- and small-caps.

In the April-to-June quarter, 69 per cent of fund managers surveyed were ready to invest 30 to 50 per cent in mid- and small-cap stocks. In the present survey, that figure has dropped to 46 per cent, and the remaining 54 per cent of fund managers surveyed plan to invest less than 30 per cent in midand small caps. No fund manager wants an exposure beyond 50 per cent in such stocks.

Though fund managers see the equity market remaining range-bound, they don't see much happening in the Indian economy. Nearly half of them expect GDP to grow at 4.5 to five per cent. Ninetytwo per cent expect the fiscal deficit to be between 4.5 and 5.5 per cent. There is also a broader expectation that wholesale price inflation will come down: in the previous survey, 69 per cent of fund managers expected inflation to be seven to eight per cent at the end of 2013, but that figure in the present survey is only eight per cent. Ninety-two per cent see inflation at five to seven per cent.

However, few expect the Reserve Bank of India to cut interest rates. Only 38 per cent expect the RBI to cut the repo rate - the rate at which banks borrow from the RBI - to less than seven per cent. The remaining 62 per cent expect the rate to continue at around seven to eight per cent. Indeed, on September 20, the RBI increased the repo rate by 25 basis points (one percentage point equals 100 basis points) to 7.5 per cent.

Views on the rupee's future vary. No fund manager surveyed sees the currency falling below Rs 60 to the US dollar, and 46 per cent see it hovering between 60 and 62. Another 46 per cent see it moving above 64, and eight per cent see it between Rs 62 and Rs 64.

Interestingly, 36 per cent of fund managers have a positive outlook on gold, up from 9.1 per cent in the previous survey. However, the majority (43 per cent) still maintains a neutral position.

There is a widespread expectation that crude oil prices will stay more or less where they are - 69 per cent of respondents see them at $100-110 a barrel.

The latest survey includes questions about bond funds. Fifty-eight per cent of respondents said they would maintain the maturity period of their flagship ultra short-term bond fund at three to six months, and 67 per cent said the maturity period of their flagship short-term bond fund would be one to two years.

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