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Fund managers see no improvement in investment climate over coming months

Fund managers see no improvement in investment climate over coming months

The second Business Today-Morningstar Asset Allocation Survey survey, for the July-to-September quarter, polled 11 fund managers on the outlook for the Indian economy and markets.

PHOTO: Associated Press PHOTO: Associated Press
Gopal Agrawal, Chief Investment Officer at Mirae Asset Global Investments, meets with executives at several companies every three to four months. The objective is to get feedback on the companies' functioning and gauge their sentiment. His latest meetings, with executives at mid-to-large companies in Kolkata and Chennai in early June, gave him few reasons to cheer.

The overall mood was subdued compared with his previous meetings four months ago. "They have been badly hit by a weakening rupee and the economic slowdown," he says. "A large current-account deficit and weak economic growth are the biggest concerns."

Despite the gloomy picture painted by Corporate India, Agrawal has been a buyer in the falling stock market. Earlier, he kept about 4-5% of his portfolio in cash but now he has invested all his cash. "In the past 10-15 days we have completely deployed our cash and added stocks to our portfolio," he says.

Agrawal has stayed away from stocks that are directly impacted by the economy, such as construction, realty and cement. He has bought pharmaceuticals, logistics, oil and gas, and private-sector banking stocks. Agrawal expects the government to speed up its investment process ahead of general elections due by May 2014.

The feedback Agrawal received during his meetings is consistent with a quarterly survey of fund managers by Business Today and mutual fund research firm Morningstar.

The second BUSINESS TODAY-Morningstar Asset Allocation Survey shows most fund managers do not expect the investment climate to improve substantially over the next 12 months. The survey for the July-to-September quarter polled 11 fund managers on the outlook for the Indian economy and markets.

Fund managers have turned cautious on India. As many as 82% of the fund managers expect the economy to grow less than 6% over the next year. In the previous survey (for April to June quarter), only 54% of those polled expected growth to remain below 6%. The pessimism is not surprising considering the economy expanded 5% in 2012-13, its slowest pace in a decade.

Some fund managers feel stock markets have overreacted to the rupee's fall to record lows against the US dollar. Alok Sama, founder and president at investment banking firm Baer Capital Partners, says stock markets are falling not just in India but also in other emerging markets due to the USUS Federal Reserve's decision to gradually roll back its stimulus package that had fueled liquidity worldwide in recent years.

"There is blood on the street, but once it stabilises, we may see good buying. I will be a buyer in this market," he says. Sama feels the markets will remain volatile in the near term. He prefers to bet on financial stocks, blue-chips and large-caps on the National Stock Exchange's Nifty index for one year, and on select mid-caps, but the holding period would be three to five years.

The survey shows 40% of the fund managers suggest investing 30-50% of the portfolio in small- and mid-cap stocks over three years. This is down from 69% in the previous survey, indicating a growing preference for large-cap stocks.

The survey also shows that more fund houses than before feel the Bombay Stock Exchange's Sensex will remain under pressure . Less than two-thirds now expect the Sensex's price-to-earnings ratio, a gauge of the index's valuation, to be between 14 and 18 times over the next two years, versus almost 92% previously.

The silver lining is that 91% of the fund managers expect the fiscal deficit to be in a range of 4.5-5.5%, while 82% say inflation will likely stay below 7% in the next one year. Inflation based on wholesale prices was 4.7% in May. With inflation and the fiscal deficit staying low, 92% of the fund managers predict interest rates will fall.

The weak rupee, though, still remains a concern among fund managers. The Indian currency has already fallen below 60 to a dollar. About 64% of those polled expect the rupee to stay below 55 to a dollar, compared with 50% in the previous survey, and no one sees it rising above 50 in 2013.

Courtesy: Business Today