The Indian stock markets have been on a heady upswing throughout September and October. Sadly, domestic investors and institutional investors have not been able to participate as they haven?t had too much by way of inflows. But most of the frontline mutual funds, hit all time high NAVs much before the stock market itself reflected an upsurge.
Does that mean that fund houses are positive the market upswing would continue? In an interview with CNBC-TV18's Udayan Mukherjee Prashant Jain of HDFC Mutual Fund said the market indices this time around were fairly valued as compared to the high PE multiples three years ago when the markets last hit 20,000. ?I don?t think the index valuations are stretched, it is certainly true that index is not cheap but I don?t think it is stretched at a broader level. I think we are as close to fair value as one can be,? he said.
Jain added that a global crisis right now would not cause the Indian markets to correct too deeply. The only negative that could see the indian market spiral would be a spike in oil prices he said.
Here is a verbatim transcript of the interview. Alos watch the accompanying video.
Q: All your NAV?s for equity products are at all time highs, do you think the market deserves to be at an all time high?
A: I think so, to put things in perspective last time the index crossed 20,000 was in December 2007 and it?s almost 3 years since then and lot of growth has taken place in these 3 years. The economy is doing fairly well. The companies are doing quite well so the PE multiples have moderated significantly compared to last time the index was at 20,000. So I would say the index is fairly valued at these levels.
Q: Are you comfortable with valuations for the index or do you think it is stretched?
A: I don?t think the index valuations are stretched, it is certainly true that index is not cheap but I don?t think it is stretched at a broader level. I think we are as close to fair value as one can be.
Q: Any apprehension that earnings might start to fall of over the next year or two which might make the market look expensive on hindsight?
A: We may be disappointed or may be surprised big time by the global cyclic trend but that is a function of how global commodity prices move. If you look at the sectors otherwise, I mean bottom up, may be consumer stocks are a little expensive but then given the quality and sustainability of businesses I think it would still make sense to hold on to them with 2 ? 3 year views but other than that I don?t really see much excesses in the market place.
Q: Has it been a difficult market to be a fund manager in; given the kind of very polar performances that you had between sectors?
A: This time around, at least at our company, the experience has been much better and we have faired better than 2007. I think unlike 2007, the markets have been clearly respecting quality and cash flows in the last two years and that is what suites our style and therefore its been a good market.
Q: So you think stocks prices have actually moved in sync with fundamentals much more than the last time we went to 20,000?
A: I think so yes, definitely.
Q: So the sectors that have underperformed deserve to be underperformers?
A: I would say so.
Q: Do you find pockets of very frothy valuations in any part of the index in any of the sectors?
A: No, we don?t find very frothy valuations at this point of time anywhere.
Q: For the cyclical sectors any sense that any of the cyclical sectors are approaching their peak in terms of earnings?
A: That is very hard to say because we don?t know where the cycle is going but if you look at cyclical compared to the replacement cost, I do not think there is any great value because most stocks are trading at reasonable premiums to replacement costs but that can happen in cyclical for fairly long period of time if the cycle keeps on improving and we don?t know which way we are going and that?s why we are basically underweight cyclical and we also feel that if you look at some other sectors like banks particularly the public sector banks, if you compare them with cyclical the risk reward is significantly in favour of the PSU banks. Not only are the valuations much cheaper but the growth is also more secular, cyclical and much higher and therefore we continue to prefer those who are the cyclical.
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