'Remain invested but expect some volatility'

Q&A/ Rashesh Shah

the reasons why foreign money will continue to pour in and the risks that are yet to be discounted.

What are the indications of allocations from foreign investors?

We believe in 2007, foreign investment in Indian capital market will be around $14-15 billion. Of this, $3-4 billion will be through the primary market route, which will include ADRs, GDRs and IPOs, and the rest will be in secondary market.

Having said that, we see the dependence on beginning-of-the-year allocations getting reduced as we have more than 1,800 foreign institutional investors, including through PNs, and all do not follow such allocation strategy.

Do you mean current valuations are not an issue?

Valuation will be an issue. Three factors are important in the market today "� sentiment, corporate earnings and liquidity-global liquidity.

Today, the market is rising as earnings have remained better than expectations and there are no reasons it will not be so in the future. Liquidity is continuing as interest rates in real terms are still lower.

Sentiment is slightly cautious. These three factors can get 2.5 marks out of three. Sentiment is subdued as inflation is high and talks of economy over-heating are on.

Which are the risks that are yet to be discounted by the market?

Basically there are three risks. If inflation continues to be high, if interest rates rise and corporate earnings belie expectations, and if global liquidity slows down.

Can the current mood be termed as a pre-Budget rally?

Pre-budget rally is generally seen couple of weeks before the Budget. In the medium to long term, there is no co-relation between the Budget and the market.

What should investors do in the current scenario?

They should invest 50 per cent in fixed income securities and the rest in equities. Equity investment should be for three years and be prepared for some volatility. Though there are no signs of big corrections, keep a watch on global triggers. What changes do you suggest for IPOs?

Broadly, the system is working well. Some fine-tuning is possible. As most applications come in the last two days, an issue should be kept open only for two days.

IPO documents should give more information on valuation parameters, and not just the price. Investors should know the valuations and investment banks should give research on the company on an ongoing basis.

Indian companies are aggressively acquiring assets abroad. Do you see any risks in it?

Large companies will not have any problems. Many mid-cap companies are also very aggressively bidding and, in many cases, with huge debt components. They should be careful. Any tightening in global liquidity or interest rate rise or economic slowdown could affect them.

What do you expect from the Budget?

The securities and transaction tax should not go up. Clarity on business and investment income is required since what is taxable at 30 per cent and what is at 10 per cent is not clear. Fringe benefit tax is cumbersome and should go.