What lags the infrastructure sector? � View on Equity Markets
Mr Huzaifa Husain, fund manager of AIG Asset Management Company speaks to Mr Debanjan Guha Thakurta, of Fundsupermart.com, India’s leading mutual fund online service provider, to give his insight on current equity markets and on the infrastructure space. He speaks about the sectors that he is bullish on and which he thinks will outperform in future.
Huzaifa manages AIG’s Infrastructure and Economic Reforms Fund which has returned 23.8% over the period of three years and is able to outperform its benchmark index which is BSE-100 index which returned 20.2% in the same time frame (source: moneycontrol.com, returns are based as at 3 April 2012).
Sharing his views on investing in equity, AIG Asset Management Company’s fund manager Huzaifa Husain says �The first aspect of equity market is that equity market is basically a reflection of the economy – it is like a mirror. The markets don’t have a life of its own; it only reflects what is happening to the real life�.
Huzaifa adds �Sometimes the markets show more optimism than the reality and sometimes they show more pessimism than reality.� He draws a simile with crazy mirrors that we see during carnivals. The times of extremism as reflected by the crazy mirrors are more commonly termed as �over valuation� and �under valuation�.
At present, the fund manager states that the markets are neither over valued nor undervalued. Indian market at this time is quite fairly valued. If one takes the risk and invests into the markets at this juncture, then one can accumulate a decent sum of money few years down the line.
Reasons for Fair Valuation of Indian Equity Market
Despite the global slowdown in 2008, which took a toll on all the nations of the world, India was quick to recover and has managed to sustain the pain. But, due to the crisis, the growth rate of India declined. The new projected growth rate of India is lowered down to the 7-8% levels from the magical figure of 9%. However, if one monitors closely, we can see that the domestic market is at the same levels when compared with 2006-07.
Huzaifa says, �The past four years have ensured that all the excesses been cleaned up. We are now standing in the crossroad of two situations. On the one hand, the market has washed out excessive valuations and on the other hand economy’s expectation has come down a lot.�
Therefore, if one invests money in equity mutual funds with a horizon of three years and above, then one can definitely make money despite the fact that the markets are somehow choppy and volatile.
The fund manager opines, �We track a ratio called Market Cap to GDP ratio which at this point of time has given us very positive signals in terms of pure valuations. We feel in the next three years investors should expect a decent return. But, we also qualify the fact that equity markets are extremely dangerous to predict with a fixed time zone.�
Furthermore, he says, �You may make money in the next six months or you may make money in the next three years. But, no matter when you are going to make money, you will make money enough to cover your time�.
Options to Invest
SIP is a far better option for young investors who want to invest into mutual funds. He/She should allocate a decent portion of their current salary and invest into the markets using the SIP route.
Moreover, SIP amount should grow year-on-year. This is because SIP is more or less like a forced saving which allows the investor to invest money into every phase of markets thereby, allowing investors to accumulate more units when compared with investing into lump-sum.
Outlook on Infrastructure
India is growing and to support the growth the government must stress on improving infrastructure. India has been primarily a country depending on consumption. As population increases, the rate of consumption goes up and to support this huge hunger of consumption, the supply side should be ready and fully equipped.
We have seen during the past few months that the supply side wasn’t fully equipped to counter the demand generated from the ever growing population. That is the reason why food prices went up so high despite the fact that interest rates were increased. Ultimately, the inflation rates increased affecting every single individual.
Huzaifa explains, �When you start consuming more and more, the supply side has to produce that much. If the supply side stops producing that much, then prices will rise and eventually it will lead to inflation.�
To end the era of inflation and to stop the high lending rates, the Government must allocate a substantial portion to develop infrastructure space and they have somehow managed to understand this and have tried their best to allocate a substantial portion of money to infrastructure sector. Moreover, they have also given relaxation to investors who want to invest into the infrastructure.
�Inflation will always grow if the infrastructure space doesn’t develop. Without investing into the infrastructure, the economy will not grow,� he added.
All the things are directly or indirectly linked with infrastructure. The population is on the rise, and people are flocking to the cities. Thus, urban development program and sanitation plans must be implemented by the government. New housing plans, hospitals, roads, trains, transport, movieplex, markets, malls need to be developed. Each one of them is interlinked with the other.
Infrastructure industry is showing improvements this year with the infrastructure mutual funds showing an average return of more than 15% for the first three years of the month.
The negligible growth attributed to the space was mainly because of the land issues, environmental problems, global slowdown, high rates of interest and other few macro economical problems. Now, as most of the problems are either sorted out or their impact is limited, it is expected that the growth of this sector will accelerate up.
The development in roadways is satisfactory but the major challenges that need to be sorted out are railways and building additional ports through which more goods and equipments can be moved in and with the help of railways they can be distributed in the various parts of the country effectively and timely.
Better and timely movement of goods and services across the country can lower down the prices of such goods. The example of onion and sugar crisis few years back highlights the situation further. Due to a sudden flood, the price of onions and sugar went up on a spree; as a result, we had to import onions and sugar. Although the government imported both the goods in substantial quantity, the prices surged before ultimately cooling off. As our ports were congested, we could not bring in more supply. Adding to the supply side bottlenecks, as the railways were not connected to ports, the distribution got hampered further more.
Bullish Sectors
Huzaifa who manages AIG’s Infrastructure and Economic Reforms Fund is bullish on the following sectors within the infrastructure space.
Logistic Sector � specifically the sectors which are related to construction
Corporate Capital Expenditure � for setting up new plants and factories which can cater to the economy by producing goods and services
Natural Gas � growing at a much faster pace compared to other fuel class. Not only the natural gas sector will grow, but other industry relating to the sector is also expected to grow.
Resources � Coal, Iron ore and other resource producer, because price is linked with global market prices
Fri. Jan 10th, 2025