With the equity markets witnessing one of their most volatile phases in the recent past, Duggal discusses the markets, the domestic economy and sectors that he believes hold maximum potential at this stage.
The Indian stock markets have run up dramatically in the last six months. The rise has probably been the sharpest in decades. How do you see the markets now in terms of valuations and investment opportunities? What is your view going forward?
The recent market moves have not been dramatic but merely represent a long overdue 'catch-up' with reality! The Indian stock market remains attractive for medium to long-term investors. The following factors should help the market perform.
The momentum of inflow from foreign institutional investors (FIIs) remains strong and stood at $855 million for the month of September 2003 - amongst the highest FIIs have ever invested in a month since they began investing in the Indian market. In the last five months, net inflows by FIIs were over $2.5 billion. We believe the increase in GDP forecast by most research houses post above normal monsoons acted as a trigger for such strong inflows from FIIs.
We believe this trend will continue going forward and that India will remain an attractive investment destination for FIIs in the medium to long term.
Please can you share with us your views on the economy and how you see it performing over the next couple of years.
We have recently upgraded our GDP forecast for FY03-04 to 7.1 per cent on the back of above normal monsoons making India among the fastest growing economies in the world. We expect all segments of the economy - agriculture, industry and services to report strong growth rates. Foreign exchange reserves are healthy at over $85 billion in end-September 2003 with the current account showing a surplus for the last two years. The INR has appreciated by about 5 per cent against the USD year-to-date. However, fiscal deficit at 5.6 per cent of GDP remains among the biggest challenges for India.
Significant investments by the government and the private sector in infrastructure areas such as roads, ports, power and telecom should help sustain growth rates in future.
Services contribute to over 55 per cent of the GDP and have been primarily responsible for the strong growth rates. With over 50 per cent of India's population under the age of 25 years, India will see a significant increase in consumers for various products and services in coming years, which should help sustain growth rates going forward. In addition, low interest rates and easy availability of retail credit should boost demand for various products and services as India remains amongst the most under penetrated market for most
How would you define your investment strategy with respect to the funds you are managing?
On the equity side, we are 'business cycle, relative value' investors, adopting neither a purely 'value' or 'growth' approach to equity investing. Instead, in pursuit of consistent performance, we adapt our approach to the prevailing economic conditions at the time. We seek to identify where we are in the business cycle and where relative value exists in a market and invest accordingly.
Depending on our judgements of the business cycle and relative value, our portfolios may have a growth or value bias. Fund composition is determined by analysis of the business cycle to identify those sectors that offer value relative to the market. Once we have chosen our sectors we then focus on stock picking within each sector. Within this, we also consider the impact of government policy and any competitive advantage India offers.
We manage our portfolio actively and take advantage of market opportunities to add value to the portfolio.
What is your view on sectoral funds? Should they find place in a portfolio at all?
Sector funds are funds that invest in a particular sector or theme and therefore represent a very high risk high return proposition relative to diversified equity funds. Given this we have no plans to launch sector funds.
What are you favourite stocks/sectors? If you could also share with us the reasons why you are optimistic about these sectors/stocks.
Having favourite stocks and sectors is dangerous as it allows sentiment to over-ride fundamentals. However, at the end of September we were overweight the automobiles, cement, technology and pharmaceuticals sectors.
Automobiles and cement
We have upgraded our GDP forecast to 7.1% for FY03-04 on the back of above normal monsoons. Our investment process on a top-down basis indicates that there is significant upside for sectors related to the economy. We expect strong volume growth in automobile companies. Earning of automobile companies is extremely sensitive to sales volumes. We expect improved realisations for cement companies. Earning of cement companies is extremely sensitive to cement prices. We expect strong earnings growth from these companies and significant upgrades in earnings estimates from analysts.
Technology
Overweight in technology as we expect earning upgrades for FY04 and FY05. Strong volume growth, stable pricing and easing margin pressure should drive earnings in future. Recruitment is at historical high and companies seem to have reconciled to an appreciating INR and improved productivity levels to ensure that it has limited impact on margins. We do not expect aggressive appreciation in the INR.
Pharmaceuticals
Indian companies are among the fastest growing companies in the US generics market. Strong process skills and low cost manufacturing capabilities give Indian companies competitive edge in regulated markets. We expect strong earnings growth in the near to medium term.
What is your advise to the retail investor?
Past events have clearly demonstrated that investors need to assess their risk appetite and monitor their asset allocation carefully. The key to investing, we believe is to get the asset allocation right and then stay invested over a period of time to neutralise the effect of fluctuating/volatile markets. Investing at regular intervals helps investors have a disciplined approach and also ensures that they do not invest at peaks. We now offer a no load systematic investment plan for the HSBC Equity Fund.
Where do you invest your own money?
All my investments are in HSBC Mutual Funds, and in particular HSBC Equity Fund! I do not trade in individual stocks as this could create a conflict of interest.
Who are the 3 people who have had a significant impact on your life?
My wife Seema and my two kids, Dhruv and Divyani.
What kind of books do you like to read?
I am not a great book reader given that I have a lot of research to read at work and story books to my children at home.