Expect moderate returns in '08: SBI MF

Looking ahead into the new year, Sanjay Sinha, chief investment officer, SBI Mutual Fund, said although expectations from the equity market remain high on the back of continued good performance in the previous years, expecting modest returns in 2008 would be the wiser thing to do.

Sinha expects the market to be plagued by volatility due to various global concerns and the mid-cap stocks to outperform their large-cap counterparts in 2008.

On foreign fund flows, Sinha is of the view that although inflows might be moderate, the country would still remain the favoured bet amongst emerging markets.

On the debt side, Sinha expects a more enthused debt market with issuances of more corporate bonds. He sees interest rates moderating slowly and a gradual interest in longer-term schemes settling in.

Sinha said global imbalances are bound to have a telling impact on Indian capital markets because they cannot be isolated from global markets.

The US sub-prime crisis has been one of the biggest banes for capital markets around the world, while the consensus is such that the world's largest economy is headed for a recession.

"You have reasons to believe that there will be a lot of volatility in the global capital markets because of events that are happening in the US, where as of now the bets are between the economy slowing down or slipping into a recession," Sinha said.

"Either of which might not be a very good scenario for capital flows. So it will have a ripple effect on the Indian capital markets and therefore we must be prepared for volatility."

Compared to the extremely good performance, investors should be prepared for moderation in terms of returns from equities in 2008, he said.

Locally, political factors could be a concern for markets, Sinha said.

Sinha is upbeat on the prospects of mid-cap stocks against the large-caps in the new year. According to him, foreign funds are biased towards large-cap stocks, while the retail investors' interest has picked up in mid-cap segment.

According to him, FIIs are more biased towards large-caps and with more local money entering the markets now, it can be said that local investors are foraying into the mid-cap space since he understands and tracks such stocks better providing local expertise.

Sinha feels that interest in mid-caps has spruced up and these stocks are attractively valued vis-a-vis the large-caps.

"One could see sales in mid-cap funds stepping up," he said.

"In terms of historical valuations, the mid-caps are trading at attractive valuations compared to the large-caps. Liquidity is coming from sources that have a greater attraction to the mid-cap segment. So, I would say that in 2008, we should expect the mid-caps to do better than the large-caps," Sinha said.

Year-on-year, BSE Mid-cap Index rose by a whopping 61.67%.

Sinha expects foreign flows to moderate in 2008, but does not see a flight of capital by foreign institutional investors despite the curbs placed on foreign exchange inflows via participatory notes and external commercial borrowings.

"Whatever impact one would have expected of the P-Note issue, I think, some of it has already factored in and whatever remains, has to be spread over 18 months, which I think will be very even."

On October 25, the stock market regulator approved proposals governing the issue of participatory notes, ending the practice of FIIs issuing securities backed by derivatives.

On ECBs, Indian companies have to compulsorily spend their borrowings overseas if they raise over $20 million. Only borrowings of lower size can be brought into the country, provided they are approved by the Reserve Bank of India.

These measures notwithstanding, India continues to be one of the most profitable investment destinations amongst emerging market economies, he said.

So far in 2007, foreign funds have invested $16 billion in Indian equities, much higher than $9 billion in 2006.

Debt market
Sinha expects a steady interest rate scenario in 2008.

He said, "Given the fact that right now we have a deposit growth rate of 25 per cent, a credit growth rate of about 22 per cent and money supply growth of roughly around 23 per cent, I do not expect interest rates to come down very sharply."

According to him, the yield on the 10-year gilt could fall to 7.25 per cent by December next year from 7.86 per cent today.

Sinha expects long-term debt schemes to witness a gradual rise next year due to a stable rate outlook.

"We will probably see interest coming more to the hybrid funds first and then gradually extend to long-term debt funds by the end of the year (2008)," he said.

Interest in these schemes has been waning since 2004, as bond yields rose amid domestic interest rate hikes, resulting in large outflows.

Sinha expects the bond market to witness increased vigour with an increase in corporate bond issuance to meet working capital requirements.