Interacting with insightful fund managers always gives us plenty of food for thought and changes our perspective on how and why the markets behave the way they do. We had the opportunity to interact with BP Singh, Executive Director and CIO – Equity, Pramerica Mutual Fund. Singh comes with an experience of over 18 years in the financial services industry and has been associated with Pramerica since 2012.
Singh started the discussion by taking us through the different phases of the bull and bear market that the country has gone through since the beginning of 1980s.
Singh observes that “if we take any 10 years in this country, we had 6 years of bear market and 4 years of bull market and the bear market always ended with a currency crisis. This is a typical emerging economy that we are into.”
Singh then goes on to explain the reasons behind the existence of the bull and bear markets and why currency crisis plays an important role during these cycles. He talked about the previous bull market, which was in the period of 2003 to 2007. During 2007, there were many new corporates which looked like they would be replacing the established names in the industry. This is because, normally at the end of the bull market, the cost of capital becomes very low which means that corporates have easy access to money. Therefore, they start borrowing overseas without even hedging it. Singh is of the view that when capital is cheap and easily available, entrepreneurs tend to lose their edge over how they allocate their capital among the different assets. A project normally has four cost components which are land, labour, material and capital. During this period, the first three components become costly on account of the wealth effect. On the other hand, capital is the cheapest and hence it goes to chase the wrong assets. This result into a lot of projects turning unviable as the businesses failed to consider the IRR. This is the beginning of a bear cycle, wherein there are a lot of unviable investments and good businesses stop investing.
By 2012, Singh recollects that the demand was catching up with the existing capacities in the system. When demand is more than supply, entrepreneurs get the pricing power back. During 2012-13, the economy was reeling through high inflation and this was caused by the underlying system. In simple terms, what inflation does is, makes the products costly, brings exports under pressure, increases imports and widens the current account deficit. When this happens, INR will depreciate and this will put more pressure on inflation, thereby making the interest rates go up. For any economy, the currency will depreciate to such an extent that the products become viable in the export market and immediately start capital expenditures. On the other hand, it is the beginning of the bull market when it comes to emerging economies that are investment driven.
According to Singh, “a bull market is a market in which the PE of the market or the company expands. When the company makes higher margins as a result of the pricing power that the entrepreneur gets in the system, it indicates a bull market phase. On the other hand, whenever, the entrepreneur loses pricing power in the system, it indicates a bear cycle”.
During the last 1.5 years, Singh observes that projects are shifting from one segment to another. There are ~ 60% of companies which are in debt, while the rest 40% are cash rich. “In a bull market, the distressed companies are motivated to sell, and the other companies find it attractive to buy”, adds Singh.
Singh’s investment strategy is to focus on these 40% of companies and the new ones that are going to emerge. This is because he believes that there is going to be innovation in the bull market. Hence, in his portfolios, he focuses on stocks that are into capital goods, construction, equipment suppliers, efficiency gainers and financiers. He is also very positive on digitization as a theme.
The Funds are managed as interplay between above mentioned theme and investment objective of respective funds.