Negative Events: Rising Interest Rates, high Inflation, Global European issues, Higher Oil Prices and Inaction of the government on domestic issues.
Inflation may be seen tapering off by December, January, and February on a reported basis.
Currently markets are not expensive, they are disproportionately cheaper
Easing of commodity prices and stability in international markets will slowly help ease interest rates in India
Reliance Equity Opportunities Fund is a multi-cap, low risk diversified equity fund which invests in stable large cap and growth oriented mid & small cap companies belonging to emerging themes/sectors which would enable to grab the opportunity much ahead of time.
Focus on selected three or four themes at a particular time
Mr. Sailesh Bhan, Equity Fund Manager, Reliance Mutual Fund highlighted series of negative events happening around the world. Rising interest Rates, high inflation, global European issues like difficulties in refinancing debt of Italy, Greece and other economies along with rising oil prices are among a few negative events. The rising oil prices at times are factored in high inflation resulting in higher interest rate in the system thereby leading to crowding out of capital. . The above events propel negative events internationally; on the domestic front inaction of the government is the major negative factor. One common point among all these factors is that they are known for over 6 months now and hence the markets have adjusted to them. Factors like re-financing of Italy loan or Greece restructuring are widely known and people have been working to resolve it over a period of time. It is a big issue but there is a lot of work behind it as a country cannot collapse easily and double dip like situations is being talked about in media. “Even if there is a double dip, the double dip will be in small pockets, small countries or in countries like Italy or Greece but it won’t completely impact various other economies even though they are financially linked”, adds Mr. Bhan. Thus, there is a clear understanding of the problem and there is a resolve to address them. Many international problems have been widely accepted like re financing of Italy which was known for 2 years. Also the fact, that growth would be slow in these countries and hence the ability to re finance it or finance more deficits is not going to be easy.
Mr. Bhan was of the view that, the entire environment is an indication that there will be muted global growth which in turn would benefit Indian equities as synchronized growth across the world shoots up the inflation. Therefore, looking at 6 months ahead from today, the base effect of inflation would be evident by November and it might be seen tapering off by first quarter of next year on a reported basis. With moderate global economic growth commodity prices should soften which has already been observed in certain pockets with an expectancy of further softening.
Mr. Bhan highlighted a strong attempt to slowdown Chinese economy has been undertaken by the government purely driven by the fear of inflation. In fact, the credit growth in the last 6 months in China has been negative 10% so there has been a lot of attempt to reduce it. This augurs well for a moderate, muted growth environment which is good for the cost, inflation and interest rate environment in India. Therefore, the negative news for the world in about quarterly time frame becomes positive for India as India’s inflation is majorly, imported inflation.
Mr. Bhan also believes that a repeat of 2008 is absolutely unlikely as:
The markets have remained flat or at the same index level, plus or minus 1000 points on Sensex over the last 45-47 months i.e. nearly 4 years of flat markets and size of the economy is at least 60% bigger in these 4 years. Even if markets were expensive in 2007 when it first touched 18000 currently; they are not expensive, they are disproportionately cheaper.
The markets may not witness a disproportionately large correction because the participation in the market since November is extremely low. The average volumes in the market are down by 30-40%; retail and Institutional volumes are at least down by about 40%. Low volumes also signify that the market prices are not driven by strong demand for stocks hence; the overvaluation in the system is not significant. “While the markets may still correct from these levels it is nowhere near the level of expensive valuations witnessed in 2007 or 2008”, adds Mr. Bhan
A lot of job creation activities especially in IT services and in regular consumer side of the economy is still very robust and good. The situation now; is contrary to 2008 where even IT services stopped recruiting and started retrenching. Thus, that scenario does not exist and IT is still one of the biggest direct and indirect employers in India. Given a timeframe of 1 - 2 year plus from here on, reasonable returns from equities can be expected in Indian markets.
Following are the factors which may surprise the markets:
Large amounts of FDI money flowing in the country, a glimpse of which has been witnessed in the recent past and a lot more can happen on that front which can in turn, lead to numerous changes.
Another worry among the people is less government action or activity in the market in terms of reforms. It must be understood that India works only as a face in terms of reforms which have been happening, for faster growth the country needs second generation reforms. Again for achieving a growth rate of 7-8% does not require blockbuster reforms, moderate or reasonable reforms in the system are enough. A few times people believe reforms have not happened but when INR 68/liter is paid for petrol, reform has already happened because it is already pricing in $90 of oil. People were given subsidy at $22 oil and they are given subsidy at $90 oil too but the quantum is much lesser from an absolute subsidy value which is been given. So a lot of reforms are already getting in to place which are not being explicitly talked about as reforms.
Easing of commodities and some kind of stability in international markets will slowly start easing interest rates in India simultaneously the equities will be seen delivering returns. It can happen in a quarter or in two quarters or even the perception of easing could come in a quarter or so which could lead to change rather than the real event which may take place 6 months later. This is the broad framework for equities; the underlying growth is reasonable.. We believe the current volatility is a great time to create portfolio with a long term view.
Reliance Equity Opportunities Fund
Reliance Equity Opportunities Fund is a multi-cap, trend based fund with the flexibility to be overweight in a particular sector or market caps depending on the potential & opportunities as they arise. The fund invests 40-60% of the portfolio large cap companies and the balance in mid cap companies. Among mid caps the fund primarily invests in selected three or four themes at a particular time. Themes like Digitization, MNC Pharma, Print Media and Retail has been played in this portfolio over the last few quarters. Likewise, a lot of other opportunities have been directed which keep coming with a 1-2 year window and deliver the alpha required. The fund has a weighted average market cap between Rs 40,000-50,000 crores, so the fund is different from a pure Mid cap or Large cap fund. The fund has an ideal combination of large and midcap companies where large cap companies provide the required stability to the portfolio and mid cap companies provide the option for growth. A small portion of the portfolio is invested in deep value companies which are ignored by the market currently despite quality managements, good cash flow, scalability etc. Owing to the news flow in international markets, people are ignoring the value in this space because there is no focus on stocks/sectors which do not have momentum today. For example: Pharma sector did not have momentum three years back when all capital goods, real estate and infrastructure were in fashion and that was the time to buy pharmaceuticals.
Risk Factors and Disclaimers
The views expressed herein constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purposes only and is not meant to serve as a professional guide for the readers. Certain factual and statistical (both historical and projected) industry and market data and other information was obtained by RCAM from independent, third-party sources that it deems to be reliable, some of which have been cited above. However, RCAM has not independently verified any of such data or other information, or the reasonableness of the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracy of such data and other information. Further, many of the statements and assertions contained in these materials reflect the belief of RCAM, which belief may be based in whole or in part on such data and other information. The Sponsor, the Investment Manager, the Trustee or any of their respective directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given are fair and reasonable. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice, verify the contents and arrive at an informed investment decision before making any investments. None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. The Sponsor, the Investment Manager, the Trustee, any of their respective directors, employees including the fund managers, affiliates, representatives including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies) / specific economic sectors mentioned herein.
Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets. Reliance Equity Opportunities Fund is name of the Scheme and does not in any manner indicates either the quality of the Scheme; its future prospects or returns. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of the future performance of the Scheme. The NAV of the Scheme may be affected, interalia, by changes in the market conditions, interest rates, trading volumes, settlement periods and transfer procedures. For details of scheme features and for Scheme specific risk factors please refer to the Scheme Information Document which is available at all the DISC / Distributors / www.reliancemutual.com. Please read the Scheme Information Document and Statement of Additional Information carefully before investing.
Statutory Details: Reliance Mutual Fund has been constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882. Sponsor: Reliance Capital Limited. Trustee: Reliance Capital Trustee Company Limited. Investment Manager: Reliance Capital Asset Management Limited (Registered Office of Trustee & Investment Manager: "Reliance House" Nr. Mardia Plaza, Off. C.G. Road, Ahmedabad 380 006). The Sponsor, the Trustee and the Investment Manager are incorporated under the Companies Act 1956. The Sponsor is not responsible or liable for any loss resulting from the operation of the Scheme beyond their initial contribution of Rs.1 lakh towards the setting up of the Mutual Fund and such other accretions and additions to the corpus.