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| Sundaram Select MidCap | 29th January 2010 | ||
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The present correction has been quite severe on midcaps. Ironically, earnings have been more robust in the midcap space than the large cap space. Clearly, this divergence spells an opportunity to invest in mid-caps - and one of the foremost names that comes to many advisors' minds is the Sundaram BNP Paribas Select Midcap Fund. Should you buy into mid caps now or wait for the dust to settle? To what extent will the newsflow from overseas impact our markets and funds such as the Sundaram Select Midcap Fund? Are the fundamentals in tact in our markets? What can go wrong from a domestic point of view? We spoke with Satish Ramanathan, Head-Equity at Sundaram BNP Paribas - who also manages this fund, to get his perspective on all of these issues and more? |
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Satish Ramanathan, Head-Equity at Sundaram BNP Paribas |
WF: What is causing this sell-off? Are there any concerns from a domestic point of view?
Satish: I think the sell-off we have witnessed in the past few days stems primarily from the fear of a rate tightening cycle across markets and also a perception that the US would be more inclined to play a little more conservative roll in the future compared to what they have done in the past. The availability of capital for buying assets could reduce and cost of capital could increase.
Growth in emerging markets is a given
But, the main thing that we need to bear in mind is that the growth in the west over the years has been on the basis of consumption and recovery will be slow. Those in the east or developing countries where the demographics are favourable, will have their own pace which will be far more impressive than what is happening elsewhere in the world. Be it China, Vietnam, Indonesia, and to some extent Brazil, the consumption pattern will remain impressive. These are all under penetrated markets in almost all aspects - financial Services, consumer goods, housing - almost all sectors are under penetrated and you will see growth remaining much more impressive in these countries for a considerable period of time to come.
Valuation is the key : corrections give you buying opportunities
The question that you need to ask is : am I getting these companies at a fair price? That's the only question that you need to ask in the east and the question is not about growth. Therefore these market corrections in my view are welcome opportunities for long term investors.
No need to presume that there are calamities always around the corner
In my view these kinds of corrections should not dither anyone from investing. It is wrong to presume that calamity is waiting around the corner every minute. Yes, we had a terrible Oct to Dec 2008, but that does not mean that every correction will turn out to be a crash.
WF: You touched upon the valuations - do you now see companies at a fair price or is there some more room to go?
Satish: I think some of the mid caps have corrected pretty well down from the peak. There are a number of mid caps which are fairly attractive at these levels.
One aspect we must keep in mind when we look at valuations is that prospects of strong growth can keep valuations also relatively high for long periods of time. It would be incorrect to view valuations from the crash levels to decide what is attractive. The crash period of Oct-Dec 2008 was a great buying opportunity, with the benefit of hindsight. Are you likely to see those valuations again? My belief is that we are not going to get stocks that cheap again.
As we stand today, we are fairly invested and almost fully invested in our funds. We don't mind going down with the market in a correction. I think from the investor perspective these corrections should be taken as an opportunity to actually build a meaningful portfolio because in our view, earnings in India could be impressive over the next 2 to 3 years - and therefore markets can provide healthy returns over this period of time.
WF : What can derail the India growth story?
Satish : The biggest issue is that if there is a severe slow down in China, which lasts for a sustainable period of time, lot of things can go wrong pretty fast. In general, India's corporate margins are higher across most industries : we are a supply starved economy. China on the other hand has large capacity and should demand fall for some reason, then prices can drop. As China begins unwinding its stimulus package, we need to see whether it has a significant impact on demand. If it does, this would also reduce pricing power for Indian companies, which means operating margins can drop. And when operating margins drop then earnings drop much faster and consequently we could have a period where earnings growth slows down for some time. If that is the case then we would see a situation were markets can remain flat or range bound one year - one and half years before the next leg comes up. So that in my view is the issue which we need to be watchful about.
Sundaram BNP Paribas Select MidCap Fund : Performance snapshot |
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