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Markets fairly valued
June, 29th 2009

In the third and final series of interviews in Smart Portfolios, Anand Agarwal, fund manager, Reliance Money, talks about the change in investor's expectations, his top picks and advice to investors with Rex Cano.

Since the launch of Smart Portfolios on September 1, 2008, the benchmark BSE 200 portfolio value has now risen by almost a per cent to Rs 10.09 lakh, while Agarwal's networth has appreciated by nearly 50 per cent to Rs 14.98 lakh.

How has your strategy changed after the sharp rally?

Post the sharp rally the markets appear to be fairly valued and one would need to be a bit more selective in their stock selection. However, a lot of the gains in the markets can be attributed to the favourable outcome of elections. Now that we have a stable government at the Centre, investor's expectations have also gone up. They now expect faster implementation of the reforms process.

Which sectors qualify as good investments now?

Given the current situation one needs to take a slightly longer term call on equities and follow a mix of growth and value investing.

Given the fact that India is more of a domestic growth story unlike most other Asian economies, one needs to focus on sectors which would benefit from the internal growth story. One could also look at sectors which would benefit from the reforms process. Some of the sectors to look out for would be banking, capital goods and power.

Your rationale for picking up TRF?

TRF is a mid-cap company which was available at a significant discount to its peers in the material handling equipment space. It was trading at around five times its estimated FY10 earnings when we decided to take exposure.

The company has posted excellent results for FY09 with revenues and EBDITA growing by 62 per cent y-o-y to Rs 723 crore and Rs 90.1 crore respectively. The company posted an EPS of Rs 73.6 for FY09. Moreover, it has a reasonable order book and pipeline over the next 12-18 months. Cheap valuations coupled with revenue visibility prompted us to take an aggressive call on TRF.

Which sectors should be avoided?

Given the sharp slowdown in global merchandise trade, we have stayed away from sectors which are more export-oriented and where India does not have any competitive advantage over other countries. An example of this is textiles.

Are we in a bull market or will the bears make a comeback?

Bull and bear markets are dependent upon the rate of economic expansion. If there is a slowdown in economic growth, then markets tend to go down while accelerating economic growth results in a bull market.

Despite the global slowdown, the Indian economy is still growing at a reasonable rate. While growth rates have come off sharply from around 9 per cent witnessed between FY06 and FY08 to current levels of around 6 per cent, the fact remains that India is still one of the fastest growing economies in the world. So gradually over a period of time as the developed economies stabilise we should see growth accelerating in India that would result in superior returns over the long term.

Which is your best and worst pick?

Our best pick has been TRF which had generated significant returns for us. As mentioned earlier TRF was a value play when we had entered into the stock. Our call on the aviation sector did not work out too well for us despite our call on falling crude prices. The call went wrong largely on account of the fact that demand fell sharply due to the slowdown. Moreover, most carriers were not quick enough to reduce capacity and the industry still has some amount of over capacity which needs to be brought down.

What should investors do at this point in time?

In the current scenario, investors need to define their returns expectations as well as risk appetite based on which an overall asset allocation strategy could be arrived at.

Given the fact that markets have run up significantly since March, investors should tone down their return expectations from equities over the short to medium term. They should be careful while selecting stocks and focus on buying stocks which are capable of generating superior returns on equity on a sustainable basis.


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