From a low of 8,047 in March 2009, the Sensex has more than doubled over the last three quarters. With such a sharp upmove and valuations in the expensive territory, experts say that investors will have to temper their returns expectations for the current year. To find out the direction of the markets and promising sectors as well as the key concerns, Vishal Chhabria spoke to Krishnamurthy Vijayan, executive chairman, J P Morgan AMC. Excerpts:
Markets have been volatile in the recent past witnessing selling pressure at higher levels? Where are they headed?
Volatility has now become part of the inherent nature of the stock markets. Few had noticed the gentle but steady rise of the markets from mid-Jan 2009 and were then caught off-guard when there was a sharp rise in light of the results of the General Elections. Even then, most investors were not convinced it was going to last. But a sensible budget and a rapidly improving economic situation then took the markets to levels previously seen in 2007. This giddy rise has made many investors cautious. While we do not try to predict market levels, it is fair to say that we are bullish on Indian equities from a medium to long term perspective.
How does the Indian market compare with other markets on the valuations front?
India is currently trading at a premium to other emerging markets and this is justified given the fact that Indian markets have a much higher ROE
Over a year, what kind of returns can you expect from the stock markets?
One year market calls are pure wishful thinking. At best one can say that over a five year period you should normally get a CAGR of about 20 per cent on your investments in funds. The reason for 20 per cent is that if the real economy is growing at 15-16 per cent, the good companies in the stock market should do about 20 per cent. Anything more precise than that is wishful thinking. For the next one year, I hope the year-end we would be better than last year-end.
How is the picture for global markets and economies looking like?
The global economic environment has been recovering over the last six months and we expect it to continue. We see confidence returning to the markets.
When do you expect the RBI to react to the inflation rate? What would be its impact?
We expect the RBI to be gradual in their reversal of an accommodative monetary policy so as to maintain a balance between recovery and price stability. The RBI could begin with measures to announce the gradual withdrawal of liquidity starting January 2010. Given rising inflation and recovery in growth, we expect interest rates to head north in 2010. This rise will be gradual as credit off-take remains at a low and the current inflation is mainly driven by the supply side. We expect the first-rate hike in the second quarter of 2010.
Considering high inflation and interest rates, how does one take care of asset allocation?
By and large, I would suggest that whatever people do, if they want to keep money for the short-term, it doesn't make any sense for them to take any risk other than liquid or liquid plus funds kind of instruments. Therefore at this point in time, what is going to be recommended is what we essentially call long-term investments accumulated over a period of time. Even in the short-term, people who have to think to not really put it away for the long-term, diversified equity funds, top-end stocks, index funds are the things that make sense.
Do you recommend investments in realty?
Real estate and gold are really for very long-term, meaning that if you don't have a horizon of 10-15 years, usually it doesn't make sense. For a vast majority, it is a seriously long-term commitment. If that be the case, I think real estate prices are still low and at the same time the level of governance is rapidly been increasing over the last year or so. As professionalism and corporatisation has come into the real estate space, so probably for anybody who is looking at a house to live in or for investment for retirement purposes, it's as good as a time to buy it.
Which themes will outperform in 2010?
This is too short a period to predict. But, if you are looking at a 3-5 year horizon then it makes sense to talk of what could make a difference to your portfolio--- essentially infrastructure, banking, IT and as corporate governance improves, real estate. Basically, the core sectors of the Indian economy, is where the action is going to be in the next 3-5 years.
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What about the small-and mid-caps space?
One thing about the small and mid-caps, usually they catch up with the index with a lag. They have a brilliant period of time because the stocks are essentially a little illiquid. The impact cost of purchases can be quite significant and again when the flavour of the month dies down they tend to fade away. The only way to invest in small and mid-caps is take a fundamental view of 7-8 years, pick the best companies and just hold on to them. Sixty per cent of the times you will be right and you will make a lot of money. Forty per cent of the times you will be wrong and that's when you lose money. But, as long as you make it at 60-40 in the long-term it's very good. Anybody who invests in the short-term, more so in the small and mid-cap sector is punting. That kind (short-term) of investing doesn't work in the Indian context.
What is your view on FII fund flow in 2010?
Benign global liquidity conditions have clearly helped emerging markets, including India. We do not expect a quick reversal. In any case, we believe that structurally, international investors are likely to get more interested in Indian equities due to faster, more domestic driven growth, sustainability of this growth over long periods, positive political environment and a wide range of quality investable businesses that will benefit from this.
What is your perception about the withdrawal of stimulus?
Clearly, withdrawal of fiscal stimulus and normalisation of interest rates look inevitable, though it is difficult to predict its timing. As long as steps in this direction are gradual, we do not believe it will come as a negative surprise to the markets. If the strong growth trend persists, private demand might be in a position to at least partly offset government induced demand.
What are the potential downside risks?
In India, very clearly it is going to be the political events, terrorism, the possibility of aggressive action in the neighbourhood, they are certainly big realities. The second, very clearly, is what happens to the global economy. The third factor, which everybody has got their eye on, is the fiscal deficit and its impact. Which means, the next budget will give you a very clear idea of how of the intention has translated into action by the government. So, these are some potential downsides.