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J Venkatesan, a Chartered Financial Analyst (CFA) and Cost Accountant, has also completed his Post Graduation in Commerce. He has an experience of more than two decades in the banking and asset management businesses. At present, Mr. Venkatesan is working with Sundaram Mutual Fund as an Equity fund manager.
1. To what extent is the current slowdown in the market explained by the decline in the rupee? What other factors are contributing to the sell-off?
The current fall in the market is largely due to the decline in the rupee. The sharp downtrend in the rupee, though a global macro move in sync with many other EM currencies, has caused the RBI to perk up the short term interest rates and made the yield curve inverted at this point of time. India’s external vulnerabilities has beenbrought to the sharp focus and the ability of the RBI and that of the Government to provide a stronger defense to the rupee is suspect as the reserves have
only 6 months import cover and the India’s absence in NDF markets exacerbates the situation. As negative sentiments are running higher, INR lost about 20% in the last 5 months or so much higher than the next worst performing EM currency, Brazilian Real, which lost about 15%.
The expectation of rate reduction cycle, which was quite high at the beginning of this year, now has to wait till the sanity returns to the forex market. The inflation worries have heightened as both the crude (due to Syrian crisis) and the rupee are against us now. The RBI moves and the crude movement would hurt growth and hence earnings growth for the market. The political uncertainties and the sluggish investment cycle also contributed for the fall. The Food Security Bill, though timed politically right, has a bad economic timing and heightened the worries on fiscal over the medium term.
2. What is your opinion on the decline in the rupee? Fact remains that our CAD numbers have been dismal for some time now, why the sudden panic?
Even though INR at Rs.68/-to a dollar is much undervalued given where the REER is currently now, as a country we cannot run a high CAD deficit of around 5%. Alarm bells were ringing when CAD touched 6.7% in Q3FY13 but we chose to ignore as we continued to get foreign flows in the face of QE moves of US FED. But with QE tapering, there is a sudden realization that India is running the highest absolute CAD level of about $88 bn next only to USA. And the way of funding CAD has also become a source of worry as the Foreign flows into Debt and Equity funded the large proportion of the gap. There is also another view that India attracts more flows on account of growth perception rather than on the interest rate differential and the RBI move has hurt this growth perception.
It is very difficult to give a view where the rupee has been headed in the short term. But in the medium term, the current move seems to have been overdone and the sentiments rather than the fundamentals seem to be at play now. Our external debt is not very high and the self-correcting mechanism would set in in due course. And still Government has a lot of options. All the monetary policy, the fiscal policy and the trade policy should work in coordination to bring stability to the rupee. Government should pass on the impact of rupee depreciation as the demand would get calibrated accordingly rather than government absorbing it in their fiscal numbers.
3. Could you please take us through the stock selection process for Sundaram Select Focus? Are there any internal upper limits set on exposure to stock exposures? In light of the volatility in equity markets will you be reducing the concentration levels in this fund?
The stock selection process remained the same. We look for good quality growth companies at reasonable price. There are no internal limits but we exercise prudence at stock allocation. As compared to earlier, the fund is more diversified in terms of number of stocks and the sectoral dispersion has also gone up. We are currently overweight on IT, Pharma and Telecom.
4. Of all the equity funds managed by you, which do you think will cap losses the most in the current market scenario?
The large cap nifty benchmarked Sundaram Select Focus Fund is likely to cap losses the most in the current market scenario.
5. If you were to put an optimistic time line for recovery of the stock markets, what would it be? Similarly what would be a pessimistic time frame for a recovery?
Any secular bull run would happen only after one gets to see the broad contours of the newly elected government and hence my optimistic timeline would be about one year.
There are certain issues India needs to sort out. The investment cycle has to kickstart. The NPL cycle severity has to get mitigated to get meaningful credit growth for the system. The growth recovery should happen especially on the Industries and Services segment. The rupee volatility should subside. The twin deficits - fiscal and current - should be brought down. We should embark on sustainable GDP growth and the Earnings momentum should pick up. So the pessimistic time frame would be 2 to 3 years more for a secular bull run.
Having said all these, the best time to build a portfolio is during the corrective phases.
6. What strategy would you suggest for investors to adopt at this point of time in the market? Should one refrain from making lump-sum investments, and stick to only SIPs?
Clearly SIPs is the best option as the volatility would remain higher atleast for one more year. The investors need not panic at this point of time as the market is pricing in the heightened worries, which may not materialize.
