Mumbai: There has been talk about how much money foreign institutional investors (FIIs) have brought in over the last few months—the number has touched $11.2 billion (Rs53,760 crore) for the year—and many FIIs have been fairly bullish about the current momentum in global equity markets. How do domestic mutual fund houses view the scenario? In an interview, Prashant Jain, executive director and chief investment officer at HDFC Mutual Fund, gave his take. Edited excerpts:
Fair valuations: HDFC Mutual Fund executive director and chief investment officer Prashant Jain
How are you feeling about this spectacular rally?We have a fairly balanced view of the markets right now and the markets are trading at close to where the P-E (price-earnings) multiples are appearing to be fair... In my opinion, if we take a two- to three-year view, we should make returns which are in line with earnings growth rates—between 15% and 20% CAGR (compounded annual growth rate).
Do you think that the kind of bearish phase that we had is over and have we entered a firm uptrend or a bullish phase?
I think it is very challenging and we rarely take a view on the short-term direction on the markets, not because we don’t want to but we find that equities as an asset class are not reliable when you take a short-term view on the markets.
To put things in perspective, the 20,000 index (the Sensex) one year back and also the 8,000 index last year—they were aberrations and many people are concerned that the rally has been too sharp from 8,000 to 16,000.
The rally has been sharp, but to be fair, that rally came after an equally sharp fall, and I think the fall was wrong and this rally merely corrected what led to a severe undervaluation.
When we spoke earlier, the index was below 10,000 and I had discussed that the index appears to be quite cheap and though you can’t time it where it would go in one year, you could focus on valuations.
At 8,000–10,000, we said the long-term returns would be significantly ahead of earnings growth and today we are saying that long-term returns would be in line with earnings growth. But I don’t think there are any reliable indicators as to where the markets are going in three-six months from now.
What kind of (earnings) growth could you pencil down for fiscal year 2010 and more importantly fiscal year 2011?
It is not fair or easy to talk about the average because the average would comprise of companies like Reliance Industries, ONGC, Tisco (Tata Steel), Hindalco, where earnings could be vastly different from what you build in today, depending upon commodity price movements. But for a moment, we remove the global cyclicals like refining and metals, basically, if you look at consumer companies like media, banks, pharmaceuticals, automobiles, we think earnings growth should be north of 15% per annum.