Get ready for a long winter and India should not be complacent: Navneet Munot, CIO, SBI Mutual Fund

In a chat with ET Now, Navneet Munot, CIO, SBI Mutual Fund, says uncertainty means it has become a stockpickers' paradise. Edited excerpts

ET Now: What is it that you are making of this technical rebound by world markets, not only Indian markets after trying to absorb the Brexit shocker?

Navneet Munot: Markets are not a one-way street, there are two-way movements and of course some of the markets that got battered very sharply are seeing some bounce back from very low levels. One must remember that this is not just a one-off event and it is behind us. There should not be any reason to be complacent again. One of the things we have to keep in mind is that in markets, every asset class is valued based on where the risk free rate is and what is the risk premium for that asset class. Now one of the challenges for a global investor is that risk free rate has become very low. I mean at the historically recorded lowest levels, if you move money out of stocks and into bonds, the so called safe haven assets like the US treasury and look at the yields from the German, the Japanese, the Swiss or the US bonds, then you start thinking that you were better off in equities because dividend yield is higher. So that is one challenge that everybody is grappling with. Because keeping cash lying around is costly and then bond yields are very low. Having said that, I think we are in a period of uncertainty and one should not get too complacent by seeing one day of rally as far as global markets are concerned.

ET Now: So what happens from here because it is an uncertain trajectory from here up until next two years when Britain is going to actually detach from the European Union. Do you think the market and India also included would be a volatile ride from here or do you think that India is working with its own dynamics post this kneejerk reaction? We are back to square one and back to tracking the monsoon as well as Seventh Pay Commission earnings etc.

Navneet Munot: Of course as far as the global markets are concerned, you are right that we are in a period of heightened uncertainty for a long period. This is going to be a long winter and large part of the western world is dealing with several structural challenges like aging population, stagnating growth, deflation, jobless growth. There are so many challenges and they have been trying to solve them through cyclical solution like printing more money or negative interest rates or zero interest rates but the problems are structural in nature. What Brexit highlights is the dissatisfaction of a part of the population which is seeing that we are not getting any benefit from globalisation, we are not benefiting from what the central banks are doing, there is a small part of the population that is benefiting.

We will have to wait and watch how much it spreads outside Britain. I am sure similar voices are gaining strength in other parts of Europe. We are seeing similar polarisation in politics in the US. So it just going to be a long winter. We will be in a period of uncertainty. India is a complete contrast. When those guys are talking about more protectionism, more favour to the domestic industry or domestic business and against immigration, India has carried out the most significant FDI reforms in its history. We are opening up a lot more, we are doing business in India lot more easier and you talked about some of the other factors which can revive growth here. So India is in a slightly different boat. It is just that historically we have always been impacted by these events and still FII flows are important. So I am sure we will get impacted but compared to our own history, the impact will be relatively lesser this time because the macro fundamentals are in a better shape and domestic flows are strong.

ET Now: So it is going to be a long winter. Would it be prudent for people who are opening new SIPs or investing into a fund take a balance fund or should the approach be all equities right now because we as Asians are anyways underinvested in equities?

Navneet Munot: So there are several parts of the economy that are doing well despite the macro challenges, political challenges, the stress in parts of the corporate and bank’s balance sheets. Several businesses in India over the last couple of years have been growing in profitability and stocks have done well. I think it is a stock pickers' paradise and as a fund manager you can always identify a couple of stocks which can do well and now we are also seeing beginning of a good cyclical recovery.

You talked about the monsoon earlier, you talked about the Seventh Pay Commission. I think that one of the interesting things that is happening in India which is under appreciated is the rating in credit. You look at the new small finance banks, the way MFIs are growing, the way private banks particularly on the retail credit are growing and I am sure at some point in time, even the PSU banks for their growth will start focusing a lot more on retail credit. The credit availability in India in the next several years across the spectrum can go up substantially. So of course there is a strain in the corporate balance sheet. They will find it tough but for a large part of the population, credit will become easier and that would be another growth driver. So India has its own set of growth drivers, we have good leadership in place, several reforms have been carried out and I think India can do relatively well but we should not remain complacent as far as the global economy is concerned. There is excessive leverage in China, there are issues within Europe and the politics is getting murkier in US and we have to keep all these factors in mind.

ET Now: The big trigger could very well be the Seventh Pay Commission recommendations and the cabinet is going to decide and take a final call on those today and for long we have been talking about as to how this is going to give a good boost to domestic consumption. But the fact of the matter is that domestic companies, your consumption companies so to speak, have already begun pricing in the upside from the Seventh Pay Commission recommendations and some of them are very richly valued as well. So what do you do, in cases of NBFCs, do you take a sectoral call, not buy a Bajaj Finance buy the rest of the pack or again this continues to be a very stock specific, company specific story according to you, I am not asking names, I am just asking for the call here?

Navneet Munot: Surely as I mentioned earlier that it is completely bottom up. I think instead of taking those sectoral calls, of course, I mean these are the big drivers in the short run. So you have a good monsoon, you have the government spending which will impact the rural growth, which will influence the rural growth; you have the Seventh Pay Commission. I talked about the credit which is an underappreciated fact in India. How the availability of credit can impact the consumption and the investment on the private side. I think some of these factors I think will ensure that the overall consumption growth continue to do well. These are the factors that can impact let us say next couple of quarters. But structurally when you are at a $1500 per capita, the way the kind of demographics and all, I think consumption is a much more long-term story in several categories, probably a J-curve is emerging and I think one needs to take that longer term call.

ET Now: The question is about what happens to the stories domiciled in India but with a larger global exposure. There are no doubts about how the revenue stream or the profit stream for the domestic spaces will be and we will talk about that. What about the export oriented themes? There is Tata Motors. There are these IT companies. All of these have so many intertwining and ponderables that it becomes difficult to gauge the impact of a global event on one-year, two-year earnings. How do you approach investing here?

Navneet Munot: Undoubtedly, one should not paint them with the same brush. Of course, those companies which have direct exports or the business is in UK, will get impacted. The global growth has been slow and much lower than the trend line it is going to impact. Having said that. just when we were talking about the domestic consumption theme and you said it is already in the price, I assume that the same thing is likely to happen here because people are concerned about Brexit, people are concerned about the global situation. Maybe some of these exporters, some of these companies let us say IT or pharma, is getting into the price. In next couple of months, if the prices correct, maybe some of them will actually become attractive. It is a just a question of relative valuation. Some of them, for example, the IT is definitely maturing in terms of the growth path that it had over the last 20 years and what it can have in the next five years. But still India is very small in the global scheme of things. Several of them can still grow substantially over the next couple of years and I think if valuations become right and most of these guys do not have the leverage in their balance sheet, the ROEs are higher. If they grow well, valuations are reasonable compared to market, they would become attractive at some price.

ET Now: The other key aspect is, how does one play or one approach the monsoon beneficiaries because there are a whole bunch of names that could benefit, some of them already have the benefits in the price. Many analysts are saying that do not look out and buy the consumer durable stocks and a few others which are the first leg of spending because they are already taking the benefits in the price, try to think where the farmers will spend the money after they have reaped the benefits of the first leg. You can make money because those stocks are not that expensive. How do you approach this space?

Navneet Munot: So I will repeat again the same thing. It is completely bottom up, you have to look at individual companies and take a call but I think agriculture for example, if you have heard the interview of the prime minister two days back on your sister channel, I think he was talking about several reforms that have been carried out right from the crop insurance to national agriculture market to soil health card to different things more spending on irrigation so on and so forth and if we have better monsoon and it is not only about monsoon, even the global agri commodity prices of cotton, sugar, rubber, soya, guar, I mean, all these also impacted the agricultural incomes in the last couple of years and they are reviving from the bottom. So I think overall the rural consumption and with additional spending, both from the central and the state governments, if you look at the state budget this year the kind of spending growth which is there and the state governments are like one and a half times of the central government spending and several of them are doing a great job. So overall I think the rural growth over the next couple of years could be an interesting place to look at.

ET Now: What is it that you are making of the sudden surge that one is seeing in real estate, of course, this could be a rub off with one of the leaders in the pack actually downsizing their debt and that very well could see a bit of a rub off in the entire sector, but do you think real estate as a space is something that is attractive at the current valuations?

Navneet Munot: So with the new real estate regulatory bill and as it gets implemented and some of the other reforms in terms of the black money law and the government talking about, structurally over a longer period this will push out the unorganised players or players who are weak in terms of their balance sheet capacity or the execution capacity and the larger income bands who have better execution capability, better financing capability they can do structurally well. There is clearly traction in the commercial real estate, both in terms of occupancy levels are going up, rentals are going up. There are some other factors as both the urban and the rural income revives and also as I mentioned about the availability of credit that improves, even the Seventh Pay Commission, you EMI paying capability goes up and that also leads to some amount of demand with some price correction at some point in time demand is likely to get revived. As you mentioned I think there are very-very few names because most of the other names still have lot of stress in the balance sheet and I think they will have some challenge. The residential space still has some challenge but this is an interesting place because all the factors that I talked about and the structural long term potential continues and I am sure I think some of these guys may do well. The survivors who have ensured that they have kept their balance sheet intact and they have the execution capability and they have the ability to grow and they reap the benefit as and when the cycle revives, I think they will do very well.

ET Now: What else is looking interesting then in the market, any other pockets that find favour right now and more importantly what is that you are advising and recommending at this juncture, is it prudent perhaps to see how this Brexit event actually plays out, what we are seeing right now is perhaps only a technical rebound, wait for the dust to settle down and then perhaps take a call or do you think the market has fallen enough after that Friday knee-jerk and right now is as good as any a time to start nibbling into the stocks wherein you had been waiting for a correction to happen?

Navneet Munot: Globally we are in a period of higher uncertainty. Having said that I think India would relatively do well, structurally over the next couple of years I think structural factors are very much intact and cyclical recovery is definitely in place. Several sectors which are more domestic oriented but at some point in time, with the price correction maybe some of the export oriented sectors will also look interesting. From an investors perspective, I think if you take a three-five-year call at these levels, I think over the next couple of years if the earnings growth are let us say 13-15% then I think the markets can deliver those returns given the valuations where they are today. So I think that is the advice I would give, maintain the discipline of asset allocation and have the faith in the structural long term potential of Indian equities.

ET Now: You talked about exporters and the other related theme has been pharmaceuticals, albeit company specific, but there has been some concern with their EU as well as UK exposure. What is the word now on pharma beucase it seems like the USFDA trouble seem to be easing out for the sector at large?

Navneet Munot: I think they had a significant volume and price growth in US over the last couple of years which is likely to slow down. There are cross currency hits that they have seen apart from the USFDA. So there have been lots of headwinds for them but may be some of these companies still have a lot of potential to grow over a longer period. Those who have a more balanced portfolio of US versus the rest of the world in India, the Indian formulations market can still grow significantly and I think apart from the pharmaceuticals, one should look at the overall healthcare sector. I am sure several companies are yet to get listed. So overall, healthcare as a sector over a very long period can still do well.

ET Now: OMCs has been the other trade which is really finding favour. Slowly these stocks have shot up -- some of them to 52-week highs -- a little unbelievable now with crude prices again taking a bit of a backseat and sort of reversing that trend. What is the opinion on some of these energy names?

Navneet Munot: So in general I would say that it also reflects that the $3 or $4 fall in the oil prices suddenly you saw a 10% movement in some of the OMCs. We have seen several of those 10% move in several stocks, it also shows the under ownership, over ownership in some of the segments. Look at the last quarter several of the Nifty companies at 10% move in a single day after the announcement of reasons because they surprise positively and somewhere it also reflects where the positioning have been, where the valuations have been and in some of the sectors or some of the stocks which are under own and you have seen some positives then I think they are moving up sharply in a shorter period of time.