Long-term fundamentals showing signs of bottoming out

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SummaryWhile a rise in interest rates may impact growth in the near term...

While a rise in interest rates may impact growth in the near term, markets will eventually focus on an improvement in fundamentals, says Lalit Nambiar, SVP & fund manager, head (research), UTI AMC. In an interview with Jash Kriplani, he said that markets may remain range-bound till state election results are declared in early December. Excerpts:

Where do you see markets are headed? Do you expect a correction or a further rally?

Long-term fundamentals are showing some signs of bottoming out; however. the recent rally may be liquidity-driven. The current account deficit (CAD) crisis, at least from a cyclical point of view, has abated. The “cool-off” of the US Fed taper may also have been a significant factor for flows into emerging market equities, including India. At the margin, there may also be optimism among foreign institutional investors (FIIs) over elections bringing in a positive change. As things stand today, the broad markets may remain in a +5% to -5% range at least till state election results are declared in early December.

Do you see any uptick in retail participation?

There seems to be a younger generation of retail investors and advisors who are generally better informed, more disciplined and appreciate the advantages of systematic investment plans (SIPs) in mutual funds. In short, we are seeing some interest from retail but the amounts are still small.

What has been your reaction to the Q2 results so far?

There were some pleasant surprises, especially in the early part of the results season. For instance, the demand traction in North America helped the IT sector and the resilient demand in rural India helped some consumer goods companies. But for others, a stronger dollar and higher debt have hurt bottom lines. In some cases, the full impact of the rupee depreciation is yet to reflect in the costs of raw materials, and in other cases, balance sheet issues remain. Overall, it would be a bit of a stretch to extrapolate this quarter into estimates for FY15. One would prefer to wait for at least another quarter.

Do you see inflationary pressures easing?

In the immediate term, growth may take time to recover due to the rise in rates, but for the economy, long-term price stability may be more crucial. The markets will eventually focus on the long-term fundamental improvement brought in by lowered inflation expectations.

How do you see macroeconomic

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