The last year was reasonably good for the Indian markets. But, with macro headwinds picking up, 2011 could be different. Jitendra Kumar Gupta spoke with Tridib Pathak, senior director, equities, IDFC Mutual Fund, about his expectations from the markets in the current year, the concerns and the earnings outlook, among other things. Excerpts:
What do you read into the sharp fall in the markets in the last couple of trading sessions? And, to what extent will this correction continue?
The correction is largely due to domestic macro factors led by high inflation and further expectations of interest rates going up. Also, the fact that the current account deficit and crude oil prices are high. If inflation and international commodity prices don’t come down fast and if we (India) are forced to increase interest rates further, then it could have an impact on growth, leading the markets lower.
Do you see last year’s optimism in the Indian markets continue this year too?
I think this year the markets will be more volatile. The markets will be increasingly influenced by global macro events such as the Europe issue, uncertainty over the US recovery and issues that could slow down China’s economic growth. I think something unusual is going on in the developed world, like many of these countries have huge sovereign debt, rising gold prices and many other such issues. If any of these events materialise, we will see their impact on our markets as well.
Why do you say so?
Commodity prices are going up as a result of money printing, etc, whereas the demand has not changed much. With gold going up, investors are increasingly getting concerned with the debasement of the currencies. People are moving into safe havens. Confidence in the paper currency is shrinking, which is why gold is rising. What is going on in the developed world is not usual and one needs to watch carefully how things will pan out over a period of time. There is a lot of uncertainty. Which is why, I would say stay with (invest in) quality companies.
What kind of returns do you expect the market to deliver in 2011?
We continue to believe that the markets would offer a 15-20 per cent return potential on a CAGR (compounded annual growth rate) basis over the next three-four years.
Any sectors you think will outperform over 12 months?
We are currently overweight on IT, metals and resources (like coal, etc) and pharmaceutical. Besides, consumption plays related to the rural sector should also do well.
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Do you think there is a possibility of earnings downgrades for FY12, given the high interest rates, higher commodity prices and raw material constraints?
It is too early to say if we could see earnings downgrades. Let us watch inflation and what happens if monetary tightening happens. Commodity prices are already higher. But we do not have to worry if they come down as the prices have reached very high levels and are not sustainable, looking at the demand.
Do you see the US recovery as a risk for our markets, which could trigger FII selling?
Certainly, if the US recovery happens, the FII money could flow back. I think a full recovery will hurt the Indian markets.
