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Whatever be the election results, recovery will continue

LiveMint logoLiveMint 11-05-2014 Kayezad E. Adajania

With four days to go for the election results, the equity market appears to be on overdrive. Since January, the BSE S&P Sensex has returned 6%. Shares of mid- and small-cap companies have bounced back; CNX Midcap index has returned nearly 10%. There is anxiety, excitement and a lot of expectations that whichever government comes, key issues such as corruption, lack of political will and slow growth will become a thing of the past. Should investors take benefit of the recent rise and plan their equity investments accordingly or is equity investing beyond elections? Birla Sun Life Asset Management Co. Ltd’s co-chief investment officer, Mahesh Patil, explains:

Markets have run up in anticipation of a strong and possibly right-centred government to take shape, in anticipation of—among other things—an economic revival. Do you think it’s a good strategy to invest before the election results?

I think investors should not bother much about the elections, as it’s difficult to predict the outcome. While there are certain implications on the longer term outlook in terms of the government that comes in, its policies and the agenda for economic outlook it will create, equity investing should be driven in terms of the current scenario, how you see it, and how that could pan out with respect to the election.

The current scenario seems to have taken into account the expectation of a stronger or alternative government as some people say.

Yes it is, to an extent. But we have seen that whatever might be the expectation, sometimes election outcomes can create volatility during that period. But finally the market will take its own course depending on how the underlying fundamentals of the economy would shape up. If you look at the current state of affairs, we feel that we’ve hit the bottom of the economy.

We have seen negative growth in the last three years. We have hit a cyclical bottom. From here on, you should see a cyclical recovery in the broader economy in the next 3-5 years. And that would be a good reason to start looking at equity again. The pace of economic recovery could be determined by the election outcome. What kind of government we get, what kind of reforms are proposed and so on. And that will affect how decisions get taken, how the investment climate revives and so on.

But I think you should see a slow recovery irrespective of that because you’ve seen a lot of indicators such as the industrial production and consumption hitting an all-time low. High interest rates have affected corporate profitability; we don’t expect interest rates to move up from these levels. Inflation should also go down and that would lead to a fall in interest rates; over the next year or two. Equity valuations are at reasonable levels despite the recent run up. With a potential of an earnings growth pick up, in the next three years you could see corporate earning grow at 15-20%.

Do you see things turning around even if we don’t get a Bharatiya Janta Party (BJP)-led government?

Yes I think so. That could lead to some market volatility because markets could react negatively on account of expectations that has been built up, but I think that slow cyclical repair of the economy, which has started, would still continue. So as against the best-case scenario where our economy could have grown at 8% in the next four years, we could probably grow at 6.0-6.5%. That could be the difference in our growth rates depending on which alliance forms the government. So yes, in that scenario growth might not be that attractive. But I think the risk-reward (for equity investing) still looks favourable compared with any other asset class at this point of time. Any new government that comes in would help as a lot of things have been put on hold.

A lot of new fund offers (NFOs) have been launched in the past year. Are we seeing a repeat of 2007?

In 2007, investors came in at the market peak. These days, it’s the reverse. People are definitely under-invested in equity. Markets have underperformed in the past six-odd years, valuations are reasonable and we are at the bottom of the cycle. So this is a good time for money to come into equities.

NFOs create some kind of buzz. While we always prefer investors to come into existing funds, NFOs compliment our existing funds with a closed-end structure.

But this sort of noise can be made with your existing schemes also. Why launch a flurry of schemes?

Agreed. But a closed-end structure instills discipline in investors and brings in sticky money.

Also, NFOs tend to incentivize distributors to get into action. I think the NFOs that you’re seeing being launched these days is just a phase. In the longer term, our well established and existing funds have to get money. Patil, co-chief investment officer, Birla Sun Life Asset Management Co tells Mint that whatever the election results would be, the recovery in economy will continue.

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