Stay away from speculation and focus on asset allocation: Nitin Rakesh, Motilal Oswal AMC

The rupee's downfall and the rate cuts, the corporate earnings potential and the investment approach are some of the issues Nitin Rakesh, CEO, Motilal Oswal AMC discusses with ET. Excerpts:

As an ETF-centric fund house, how do you create interest among investors chasing outperformance?

Investors are chasing outperformance, but are they really getting it? You can get outperformance either by picking the right stocks or through the right asset allocation. We are also saying that you can outperform, but by using the right mix of assets. Our focus is to help investors build portfolios using the asset allocation strategy with the help of such products.

We have chosen ETFs because these are one of the most efficient ways of constructing a portfolio in terms of low cost, high transparency, liquidity, etc. We are not saying that 100% of your money should be in passive funds, just that you can create outperformance by asset allocation as well. So, if you had 20% of your portfolio in a non-India asset such as Nasdaq 100 ETF last year, you would have gained tremendously. Nasdaq has a correlation of only around 25% with the Nifty.

Gold has been a good investment over the past few years because of its zero or low correlation with equities. Asset allocation is driven by non-correlated assets that bring down portfolio volatility and deliver better returns. That is the building block of our business strategy. Our goal is to open segments of the market that are not accessible to investors, such as our mid-cap ETF or Nasdaq-100 ETF.

How do you tackle the liquidity problem faced by ETF products here?

Due to their structure, ETFs have liquidity issues across the world, not just in India. The way you trade ETFs is a little different from the way you trade stocks because of low depth. Even in a stock market, there isn't enough depth beyond the top 50-60 stocks.

ETFs offer a challenge when it comes to managing liquidity or depth. Some of our products are fairly liquid. It is work in progress for us. We have appointed a set of market makers who specialise in these products. We have created a liquidity assist desk in our dealing room, where investors can call if they are not able to trade, and we try and sort out the problem.

What role does gold have in a portfolio?

Everybody holds gold in some form, be it paper gold or physical gold (jewellery). Most households in India continue to buy gold every year. At the end of the day, it is definitely a store of value. We are almost near highs in gold prices, especially in rupee terms.

There has been some climbdown in prices recently, but as long as there is uncertainty in the world, gold will be a favoured asset class. Unless there is a solution for all macro problems, gold will continue to be a safe haven. If you are going to buy gold, it is better to do so in the most efficient manner, that is, through gold ETFs, wherein you get pure gold at a lower retail price.

Which new products do you plan to launch?

One should not innovate for the sake of innovation. We have already brought 5-6 new products in the market and have a couple more in the pipeline. We have filed for a liquid product and a couple of international funds, such as the S&P 500 ETF. There is also a regulatory limit on the number of products we can create. If we find the right niche or asset class, we will try to open it for the investor. There is much more we can do on the fixed income side.

Will rate cuts revive the investment cycle and spur economic growth?

The cycle of monetary easing has started, but whether we will see aggressive rate cuts is doubtful. Clearly, there won't be a repeat of 2008, where we saw a one-way fall in interest rates. The environment is much more complex and challenging now.

We have fiscal deficit, high government borrowings, trade deficit, currency issues, and so on. So, the RBI will adopt a very cautious approach, and if inflation picks up again, we may even see the cuts being aborted. This will be a slightly unique easing cycle.

How long will rupee's weakness continue?

There is pressure on the rupee on all fronts, so there is no reason for it to strengthen. Oil prices have added to this pressure. If they cool off, we may see some easing as it is a big source of dollar demand. The rupee appreciated in the first quarter because of strong flows.

We will have to get used to this new normal of rupee trading in the 50s, unless things change drastically from the perspective of flow or real economy. We are running a high deficit and spending more than the earnings. Almost every emerging market is facing the same problems-slow growth, stubborn inflation and high deficits.

What do you think of the current earnings season?

There haven't been any major disappointments. The only surprise is the extent of provisioning in some PSU banks. The issue isn't so much about how the fourth quarter earnings for 2011-12 are shaping up, but how the 2012-13 earnings are likely to be. Will we have to revise the earnings downwards again? We have been in a downward revision cycle for four quarters. For now, our internal estimates are 12-13% growth in earnings for 2012-13, a bit more conservative than that of others.

Which sectors will do well in 2-3 years?

From an earnings point of view, safety seems to be in consumer staples, FMCG, pharma sectors and, to an extent, in IT services. Unless there are clear signs that the situation will improve domestically and globally, the defensive bets will continue to be in focus.

The valuations are stretched, but you will find at least 15% earnings growth in these. We have stayed away from high beta, beaten down sectors; just because they are cheap does not make them good buys. If we consider the rate-sensitive sectors, it will be select banking stocks.

What is your advice for retail investors now?

Don't try to time the markets. There is no way you can make short-term gains consistently. Luck doesn't hold out for long. One should build a steady portfolio focusing on long-term objectives and with the right asset allocation. Focus on how you allocate your assets and stay away from speculation.