While the markets ended the year on a high, inflation and an increase in interest rates could have a negative impact on the earnings of companies. Jitendra Kumar Gupta talks to Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance on these issues as well as the key sectors to invest in
Where do you think we could head this year given the expensive valuations, inflation and interest rate concerns?
The markets look expensive based on the 2010-11 numbers. However, they have started discounting 2011-12 and are fairly valued at 16 times the earnings at the current level of 20,000 and leave scope for a further upside, unless global events derail this movement. I feel inflation and interest rates are factored in the prices. If the broader economic and corporate profit growth continues, which is the expectation at present, we will not be surprised to see all-time high levels in 2011.
Do you think there is a possibility of earnings downgrades for 2011-12?
There is some risk, but we have not built in very high expectations. Our estimate of 18-20 per cent corporate profit growth keeps some margin for a high interest rate and commodity prices.
Will sectors such as infrastructure, power, capital goods and real estate which did not participate last year shine in 2011? Which sectors will do well?
There is a high possibility that the underperforming sectors will give better returns in the first half of 2011 as they are attractively valued. Besides this, private sector banking, consumption sector, oil & gas and the infrastructure sector should also perform well.
Which are the major events that need to be watched in 2011?
The rise in the US interest rates and the sovereign risk of Europe are the two major concerns today. If China succeeds to curb inflation in a quarter or so, it will be a positive for the long-term growth of the Chinese economy and markets.
Will the markets remain range-bound and volatile?
This behaviour of the markets is expected to continue for some more time till they cross the all-time high level.
More From This Section
In the event of a US recovery, do you see the possibility of a slowdown in the flow of foreign money?
We expect Foreign Institutional Investment (FII) flows to continue in 2011. A $30-billion inflow for a trillion-dollar economy is not huge. Similarly, this amount is a very small portion of the large global investable surplus. India offers good long-term investment opportunities, given its consumption and investment-led growth.
How would you advise investors in 2011 in terms of strategy?
The markets may remain choppy but the only way to capture the best of the Indian markets is to stay invested for the longer term. There would be cyclicality and sector rotations. Diversified portfolios will do well as compared to sector funds.
