Have the equity markets recovered from the correction that they have been through or there is a downside still
Our sense is that the markets have already registered the lows and while we may again see a downside, we expect the earlier registered lows to be held. The sharp fall in the markets was as a consequence of unfunded losses registered by the global banks which caused them to pare down their books and resulted in an artificial monetary squeeze. Our belief is that this issue is behind us.
Moreover, the sharp fluctuation in currency market, which also forced selling from sources that had leverage as part of the strategy, is also showing signs of abatement. Yen which had breached 100/USD, is again trading at around 104/USD. This again reduces the forex derivative related losses that were feared. Overall, since the macro environment has incrementally improved and is seen to be sustaining, we believe that the downside from the levels already seen may not be there.
With inflation rising, what should be the regulator (RBI) stance in the coming monetary policy to control inflation and spur growth
We believe that rising inflation in the face of slowing growth prospects would continue to challenge policy making for some time. However, we believe that while the central bank may use various measures to reduce liquidity in the system, so that excess liquidity does not contribute to inflation, it would not deploy the interest rate tool because the source of inflation is the sharp increase in global fuel and food prices and an Indian monetary response to a global event may not solve the problem.
We believe that inflation targeting would take place through fiscal measures and through policy which may make exports more difficult and imports cheaper and easier. Already we have seen several initiatives to this effect and our sense is that these initiatives would be taken positively by the market.
What is the strategy you think should be employed to battle these uncertain times
We believe that there is comfort in valuations and hence maybe it is in the interest of long term investors to stay invested in a diversified portfolio of stocks. However, since the various parameters are still volatile, it would take some time before a sector gains leadership.
Hence, it may be opportune to invest through funds that are presently focused on the large cap and liquid part of the market and are positioned close to the index and only gradually move away to take sharper sectoral bets or stock bets as the financial markets stabilize. We believe that the stability in the world market would be manifested in the currency markets and this may be an easy way for investors to get a sense of stability.
What are the key sectors you think are attractive at the moment Why
We believe that valuations across the board are still benign, except for maybe the capital goods and automobile and auto-ancillary sectors where we believe that passing on of the input price increase may be difficult and hence margins may get impacted.
The pessimism on the capital goods space is on account of the fact that this space trades at a premium to the market and while there may be comfort in orderbooks, margins and execution may be slipping. However, these are near term concerns and over the medium term we believe that even the capital goods sector could show good performance on account of the fact that currencies of the competing economies have appreciated vs. the rupee and that has made the Indian capital goods companies more competitive. Even the automobile industry may be helped by the wage increase for the central government staff over the medium term.
Hence, while in some sectors we may have short term concerns, we are optimistic on most sectors over the medium term. This basically underlines our confidence on the market. We believe that there is a reasonable comfort in valuations.
Would you recommend investors to rebalance their portfolios and take some more exposure to fixed income and alternate investments
We believe that the India growth story is of a secular nature and the current valuations are not expensive. That being the case, in terms of returns, the interests of an investor is best served by investing in the equity markets through a diversified equity portfolio and the investors could use the services of mutual funds that provide such portfolios. However, we also believe that in the near term the markets could be more volatile than usual and interests of investor with short term surpluses could be best served if they are invested in debt.
Do you see enhanced liquidity coming in from overseas investors and also domestic institutions
We believe that there are already signs of global flows turning positive after being negative for a sustained period. However, the flows would increase to normal levels when the risk appetite increases from the current low levels and the currencies stabilize. It is difficult to allocate money globally, for a particular portfolio outperformance, when the volatility in the currency market may be of a higher order.
What would your wish-list for regulatory change be
We would like to see ECB route opening up for Indian corporates. With costs of rupee borrowing not expected to fall in the near term, the competitiveness of Indian corporate sector can be preserved if access to foreign money is made easier for domestic investment as that would let corporates to make use of current prevalent lower interest rate scenario globally. This would also help the growth prospects of domestic manufacturers as they may get more orders.