In equity markets, change is the only constant. Giving the much needed ?Alpha? is all about keeping the cool and doing things with conviction. Tushar Pradhan, CIO HSBC asset management (India), with his decade-long experience in fund management is one such old hand, who strongly believes rerating of emerging markets is on the anvil, which could spell good news for Indian equity markets. In a tete-a-tete with Chirag Madia and Muthukumar K, he shares his views on myriad issues of fund management. Excerpts:

What is your considered view on the Indian stock market?

The equity market is at fair value?one year forward earnings are in line with its historic averages. While markets are getting volatile (with constant flow of news and changing perceptions), in the long run, it does provide good arbitrage opportunities. Going forward, I think emerging markets (including India) will get rerated. Historically, it has been quoting at a discount to the developed markets, on the reasoning that developed markets had much more robust economies as well as sound government finances.

If you had to look at Latin American companies 10 years ago, they were heavily in debt, coupled with higher inflation and unemployment as well as fiscal deficit. So, its market traded at a discount despite its corporates showing good earning numbers. Things have changed now and some of these countries have fiscal deficit under control and the domestic consumption story is playing strong. In contrast, European economies are reeling under recession and their fundamentals are getting altered. So in a sense, there is a shift?what we thought was secure is no longer secure, while countries which were historically unsecure are becoming safer bets.

Could higher inflation trip the economy?

Inflation is a big concern for countries like India. A large chunk of our population is under the poverty line. In that sense, even an incremental rise in the food inflation will impact their ability to survive. There were several causes which led to spike in inflation; for a starter, poor monsoons. Then, there was an increase in the commodity prices last year, as a result of the pass through effect of high oil prices. This year, we have seen price rise at the product level in India. However, going forward, if we have normal monsoon and significant agriculture production, then prices will come down. And if oil prices remain at current levels, it could be another inflation deflator.

In my opinion, inflation will cool off towards the second half of the year as monsoon will be behind us. That?s when the base effect will also stop petering out. In the coming days we could see further tightening of interest rates. It needs to be mentioned that the Reserve Bank of India (RBI) has time and again made good efforts to control the inflation in the economy.

Will FII inflows continue to dominate the direction of the equity markets? They invested upwards of $ 3 billion. post budget…

Nothing is going to change for a while, as household investments into equity markets remain low. But at some point of time, it will hopefully change. Last year we saw record FII inflows; this year will also witness strong inflows. I think risk perception towards emerging markets is changing and we believe emerging markets are getting more attention; India is one of them.

For the first two months of the current calendar year, FIIs sat on the fence waiting for the budget. And when they found nothing negative with the Union Budget, they started putting money back into the Indian markets. The recent S&P upgrade from negative to stable has been positive for the markets. FIIs look for stability in economy, earnings and currencies which is emerging in Indian markets.

What are your views on the new Sebi regulation to mark to market all bond portfolios above 90 days?

Liquid and money market funds will now reflect the true portfolio risk. Even before this rule, we had an internal assessment done last year and consciously built portfolios taking the 90-day period into consideration. However, the downside was that our yields were lower than other funds?. The new stipulation should correct such anomalies.

Inflows into equity funds aren?t as strong, post ban on entry load. What?s your view?

The real problem in equity funds is that of choosing a product. Investors will get long-term appreciation in equity funds, but for that financial literacy is important.

The concept of ?mutual fund? was invented around 1930 in US, but it became a popular investment vehicle only in the 1980s. In that sense, it took around 50 years to get there. In India, we saw the emergence of mutual funds only in the 1990s. Though we are witnessing inflows into mutual funds, it will take time. There is a popular thinking among investors that stock markets work like casinos. So investors enter the market when they are up and exit when they are down, without looking at the longer haul.

There are a lot of IPOs in the market. Are you investing in them ?

Yes, we are evaluating these IPO issues.

Recently market regulator, Securities and Exchange Board of India (Sebi) came out with rules mooting mutual funds to play an active role in ensuring corporate governance among corporates. What is your take on the issue?

I think it is a positive move. As an asset management company if something serious comes up which might impact the investors in anyway we would vote. But if routine things come frequently then we might opt not to vote. As a company we have always maintained that whichever company we are investing in should be transparent.

Recently you have filed an offer document to launch a Brazil fund. Why now ?

A country specific fund (like that of Brazil) might give a better opportunity to investors (say, who are bullish on one country) than a global emerging fund, which invests in a mix of countries. Asset management companies are essentially manufacturers and we will give investors a host of products to choose from?it finally depends on the investor whether he wants to invest in it or not.

What are the golden rules for investing in stocks?

There are few simple things I look at. Firstly, whether the business is scalable and is run profitably. Secondly, the growth potential of the company. Then, quality of the management which runs the business. Last but not the least, the company financials. For example, whether the company can raise the money and if they deploy it properly.