Interview- Rajiv Anand

Buying into such upheavals pays off in the medium term
Sandeep Singh Posted online: Monday , October 22, 2007

The fund managers of Standard Chartered Premier Equity must be doing something right, as the scheme has delivered the second-highest return among all diversified equity funds over the past year. It’s why we caught up with Rajiv Anand, head of investments, Standard Chartered Asset Management Company, and asked him to make sense of what was going on in the market and to look ahead. Our correspondent put the questions to Anand, and this is what he said.


What’s your take on Sebi’s proposed change in regulations for participatory notes (PNs)?
We have been seeing unprecedented foreign capital inflows, and these flows are not being absorbed into the economy fast enough. As a result, the rupee has been appreciating. The pace of appreciation is being controlled by the Reserve Bank of India through regular intervention in the foreign exchange market. This action, however, creates huge liquidity in the banking system, which, in turn, needs to be sterilised by the RBI through various measures like issuance of MSS bonds, increase in CRR and the daily repo window.The current measure is just one more instrument being used to manage or control capital flows, especially those that are speculative, rather than of a long-term nature. Earlier, we have also seen curbs on inflows through the external commercial borrowings route. The impact of that on inflows has been minimal.Flows into India will remain strong as long as global investors seek out compelling long-term growth stories. The question is how can we increase the absorption capacity of the Indian economy. This is very critical as we are in a situation where the huge inflows are having a negative impact on certain parts of the economy, resulting from an appreciating rupee. On the other hand, we also need foreign inflows to fund growth. Managing these two aspects is a key challenge going forward.

As fund managers, do such upheavals change the way you manage your equity funds?
We believe that corporate earnings will continue to remain strong and the macro fundamentals remain robust. History has shown that buying into such upheavals pays off in the medium term.
Even at 19,000, the Sensex is discounting its expected March 2008 earnings at about 20 times, which is not bad. However, deeper, there are stocks, especially those who have driven this rally, whose valuations have doubled in a short period of time. For instance, ABB is quoting at a PE of 70-odd. Aren’t many stocks overvalued?As fund managers, we don’t buy the market. We buy into companies with strong growth potential. Therefore, one needs to look at PEs not on a standalone basis, but in conjunction with the growth potential of the company. Having said that, clearly, there are pockets of overvaluation in the market, where earnings expectations look rather optimistic.Current valuations don’t factor in the execution risk over the next few years. Therefore, one needs to closely monitor the execution of expansion plans on a company to company basis. Only those companies that don’t disappoint on this front will be rewarded by investors.

What’s your advice to small investors now?
What are the checks and balances they should employ? And what are the excesses they should guard against?Investors need to manage their return expectations to more realistic levels. They also need to have a long-term perspective to equity investing, as short-term volatility can hurt their financial health. Lastly, avoid leverage positions unless you are a seasoned investor, as the impact of short-term volatility gets exaggerated for investors who have taken leveraged positions.

The first batch of Q2 results are out. On a year-on-year basis, revenues of 150 companies have grown 24 per cent, net profit 40 per cent, which is pretty good. Is that an ‘early bird’ surge or is it representative of the larger set also?
We believe that corporate India is in fine fettle. Barring a few sectors like pharma, auto and auto ancillaries and, perhaps, cement, it should, by and large, meet the expectations of the market. And this strong earnings growth should sustain.

Which are the sectors and stories you are bullish on?
And which are the ones losing steam?We believe the Indian economy will be driven by two key growth engines: infrastructure spending and consumption driven by changing demographics. Therefore, we are bullish on stocks that are within these two themes or sectors that cater to these two themes. These would include the entire power landscape, construction, capital goods, financial services and telecom, to name a few.By the same token, we are more cautious on themes whose success is driven by global considerations, given the headwinds from slowing US growth and an appreciating rupee. Basically, all export-oriented sectors like IT, textiles and auto ancillaries.

The rupee just keeps appreciating. Will the restrictions on PNs reduce the pace of that rise? What’s your outlook on IT stocks now?
The restrictions may reduce inflows in the short term, but given the strength of global capital flows and visibility of growth of the Indian economy, it is inevitable that flows will reassert themselves in the medium term. IT is currently facing headwinds from an appreciating rupee and wage inflation. One will need to see how these businesses cope in such a situation, and manage growth and margins.

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