How do you think the markets are currently placed in terms of future projections Are there still more major events one is waiting for before commenting or have the election results given a clearer picture If so, what is the current picture
Markets are no more cheap. At the current level, the market is discounting most of the macro positives for the next one year. But the clear mandate given to the government in the recent election is definitely a very positive development. As a result, the market has started discounting the earnings growth beyond the next one year. Let me try to explain this point. The Indian economy has been facing four major structural challenges. The first challenge is to ensure that employment is provided to this vast young population. Every year, 30 million people reach the age to start their service life. Therefore, high growth is not an option but a necessity for us. The second challenge is derived from the first one. In order to propel a 9% growth, you roughly need 25,000 MW of power generation to be added every year. The challenge is to fund these huge infrastructure needs in the light of the current international economic environment. The third challenge is the regulatory reforms to create a friendly environment for investments. The last but not the least is agricultural growth keeping pace with population growth. Three fifth of our labour force comes from the agricultural sector, while it contributes to only one fifth of the GDP. We think what has changed post the election results is the expectation built-up that the government with a long-term clear mandate will be better equipped to address these issues. As a result, the economy will again return to a long-term structural growth path.
However, in the short-term there are two major events yet to be unfolded and they are the Budget and the monsoon.
As of now, which sectors would you be bullish on and why While the markets have reacted favourably to the election results and we had record volume trades immediately after, do you feel this momentum will continue for sometime now or was it a short-term phenomena
GDP runs on four engines. They are consumer spending, gross investments, net exports and government consumption. Till recently, fund mangers largely designed their portfolio on the basis of clarity in earnings projection on and around the consumption spending story. However, what has changed recently is that these growth projections have now extended to gross domestic investments and as result we are witnessing some major rallies in infrastructure, construction and engineering stocks. Besides, as the world de-growth story is expected to come to an end by the end of the current calendar year, metal and commodity stocks are also looking attractive at the current levels. Since market is at the highest historical P/E level, any negative surprise and global cue may halt this rally to a great extent.
This time around, people are far more conscious about booking their profits Do you feel this is a good move or the premature booking of profits will slowdown the overall market recovery
If people take a long-term call on the market, then they may not be eager to book immediate profits. Obviously, that will be beneficial for the market in the long run.
What advice would you give to investors who are now looking to jump back into equity investing
Be aware of the risk-return relationship in investments. The risk and returns are positively correlated and high return expectations are always associated with a high degree of risks. No one has ever invented a way of getting something for nothing. Please evaluate your risk appetite before investments. However, if you are a long-term investor then there is no point in trying to time the market. Notwithstanding the macro challenges, India is truly an emerging economy and one must stay invested for long-term returns.
Are you'll still sitting on a heavy cash ratio or has a majority of the funds been invested Which sectors or areas are you investing in now and why
We are largely invested. We are overweight on banking and finance, metals, auto and power.
When do you feel will the economy stabilise to the level that people start making investments more freely again
The economy, according to me, should stabilise from the third quarter of this financial year.
What do you feel about the debt market Has it really gone past its peak or are there still opportunities available
We think that we are at the last leg of the rate cut cycle. Inflation will again become a nagging problem post November 2009, partly due to the base effect and partly because the commodity cycle is expected to recover. We do not feel that the excess government bond supply will put much of a pressure on the yields as the RBI is expected to mop up the excess government supply. As a result, the quantitative easing will continue and the short-term rate may not firm up substantially even if the inflation starts inching up from November onwards. However, if the capex cycle turns, then a fresh supply will put an upward pressure in corporate bond yields.
On the overall balance, we feel that the upside in bond prices from the current level is limited.