Billionaire's Fund Sees India Extending Bear-Market Lossesby and
Hedge fund awaits further 10% drop in values to turn bullish
Sensex at the brink of bear market after 20% slide from peak
Indian equities battered by this year’s $7.9 trillion rout in global equities are expensive for a hedge fund manager who counts billionaire Uday Kotakamong his clients.
The S&P BSE Sensex, which dropped to the brink of a bear market on Wednesday, is still valued at a 9 percent premium over its five-year average. That makes it vulnerable to outflows at a time when a recovery in company earnings is taking longer than expected, according to Venkat Subramanian, chief executive officer at Infina Finance Pvt.
“We will look at building net long positions if the benchmark indices drop another 8 to 10 percent,” Subramanian, who manages a 20 billion-rupees ($290 million) long-short fund, said in a phone interview from Mumbai. Fund outflows “remain a key risk and corporate metrics aren’t looking good. The deflationary environment can drag profits further.”
Indian stocks, the rupee and bonds saw their worst January since 2011, as global funds pulled $1.9 billion from local shares this year on anxiety about global growth and a rout in energy prices. The Sensex trades at 16.8 times one-year forward earnings, compared with its five-year mean of 15.5, and a multiple of 11 for a gauge of emerging markets.
So far, half of the Sensex companies that have posted earnings for the December quarter have beaten estimates. That compares with 57 percent of index members whose earnings beat or matched forecasts in September, and 60 percent in June. The Sensex tumbled into a bear market Thursday after extending losses from its January 2015 peak to 23 percent.
“With a recovery in corporate earnings several quarters away, only a sharp correction in prices can justify buying into this market,” Subramanian said. His fund has returned an average 16 percent annually over the last six years through December, versus an yearly gain of about 6 percent in the NSE Nifty 50 Index, according to Infina Finance.
Damage from the sell off has been heaviest among bank shares amid concern about rising bad loans. A gauge of 12 state-run lenders is trading at 0.5 times its book value, an all-time low. State Bank of India, the largest by assets, is the worst-performing stock on the Sensex this year, after slumping 28 percent in 2015.
The erosion in share values could deepen as lenders boost provisioning before the March 2017 deadline set by the central bank to bolster balance sheets, Subramanian said.
“Complying with the RBI’s directive and providing for stress in their balance sheets will weigh down on banks’ profit growth in the short term," he said.
State Bank’s net income fell 62 percent to 11.2 billion rupees for the three months ended December, from 29.1 billion rupees a year ago, the lender said Thursday. ICICI Bank, the largest private sector lender, posted slowest quarterly profit growth in six years in the same period. State-owned Punjab National Bank reported a 93 percent slump in fiscal third-quarter net income, while Allahabad Bank and Central Bank of India reported losses.
Kotak Mahindra Bank Ltd., 33.5 percent owned by Uday Kotak, is also among investors in Infina’s long-short fund, according to Subramanian.