Good time to invest' SMART TALK/ Nilesh Shah

ICICI Prudential Asset Management Company is India's second largest mutual fund with assets under management of about Rs 60,000 crore. The man responsible for investments across its 40 schemes and personal management services is its deputy managing director, Nilesh Shah. 

In this interview to Jitendra Kumar Gupta, he talks about the current situation of the market, the fallout due to high oil prices, interest rates, inflation and steps investors should take to maximise their returns.

Is the slowing down of India's growth rate responsible for the market's performance? 
India continues to be on its growth path and nothing has changed fundamentally with the Indian economy. 
However, certain events like increasing oil prices and rising inflation have slowed down the pace of growth but have not derailed the economy's growth process. However, the Indian economy and equity markets are two different things. 
Indian equity markets have crashed from January 2008 as the FIIs have pulled out more than $6bn on account of perceived deterioration in macroeconomic fundamentals viz. higher oil prices leading to higher trade deficit which has resulted in a weaker rupee pushing inflation higher and increasing subsidy burden resulting in higher fiscal deficit. 

What's your call in the short term and what should investors do in these volatile times? 
Current market situation is more sentiment driven with high emphasis on global oil prices. Hence, in the near term a lot will depend on direction in which oil prices will move. 
However, in the long term we continue to remain positive on Indian markets provided there is adequate policy response. An investor should never try to time the market. We recommend to investors who have already invested to bear the pain and stay invested. For new investors, we recommend the simple rule of systematic investments with a long-term investment horizon. Additionally buying on each dip could add to their overall return.

Do you like any particular sector or theme, where one can invest for the long term especially when the markets are down? 
Looking at the ownership of Indian equity by retail investors, I can only say that first invest in broad markets itself and then look for specialisation. 
With India growth story being at the helm of all policy decisions, a theme like infrastructure is interesting. Mutual Funds dedicated to this theme could serve as an option. Another interesting sector is the banking and financial services sector which has seen substantial correction in the recent past and are available at attractive valuations. 

Which risks have the markets not factored in as yet? 
Most of the event risk in terms of high inflation and oil prices are being factored in, however sentiments are still weighing higher than fundamentals resulting in downward move of the Sensex. The markets will always find a villain. Currently oil price is the fear factor, tomorrow politics could be the one. The point is to look at valuations and invest. 

Given the current situation, do you expect a downgrade in earnings (for FY09) for India Inc.? If so, by how much? 
Sure there will be a earnings downgrade in the corporate sector. Higher oil prices and higher interest rates will erode earnings. Most analysts wake up to this post facto. When horses have bolted they will close the gates. The good thing is that markets are much smarter than analysts like us and moves ahead of events. 

What are your expectations for Q1 results? Which sectors where you expect companies to surprise positively and negatively? 
We think Q1 results will surprise the market positively, if the advance tax collection in Q1 09 is any indication. We think banking and real estate will shock the market, auto, FMCG and pharma will be in line with market expectations. Tech, metals and infrastructure space can surprise positively. 

In the current environment isn't investing in debt instruments more attractive? 
Investors with the help of a financial advisor should get their financial health checkup done and then arrive at an asset allocation strategy. Under this asset allocation, debt should certainly be a part of the portfolio as it offers stability to returns. However, we do not recommend income and gilt funds at this stage as we expect 10 year yield to go further up. We recommend investors to look at FMP in the current rising rate environment. 

What is course interest rates and the inflation will take going forward? 
The inflation cycle is likely to soften towards the Q4 of FY09. This will be more due to good monsoon, base effect and hopefully lower oil prices. The interest rate cycle will be primarily driven by inflation and then by government's fiscal deficit. We expect yields to remain high on government securities till inflation persists and government has to run higher deficits. Let's hope that the 10 year G-Sec yield starts stabilising at 9.5 per cent yield. 

What happens to interest rate sensitive sectors? 
Interest rate sensitive sectors have corrected sharply. We believe that currently banking and financial services sector has corrected substantially and is available at attractive valuations. 
This sector being the lifeline of any growing economy, has high potential on the upside. The real estate sector has corrected significantly and on a selective basis provides some opportunity. 
Automobile sector has moved from value to deep value or cheap to cheaper segment. It should do well unless oil prices go up substantially. 

What is your view on crude oil prices over the next 3, 6 and 12 months and, the implications for the same on India's GDP and the markets? 
India imports about 70 per cent of its crude requirement. Even though the prices are regulated for end consumers, high oil prices hit most of the industries associated with oil adversely. High oil prices not only impact the input cost but they also influence sentiments, which in turn is adding 
on to market volatility. Oil prices are today a function of demand supply mismatch and speculation. It is extremely difficult to predict how they will behave in the near term but in the long term they will decline reasonably as the law of average catches up with it. High prices will reduce demand and increase supply, and invisible hands of Mr Market will bring oil prices lower. 

Is there value in the market at current levels? 
Currently there is not only value but also deep value in the market. You are unlikely to get such a good environment to invest in the markets. The best way to tap the market is to either do hard work yourself and invest or seek professional help. Markets look attractive at current levels. We continue to believe in the long term story of the Indian economy and also the Indian equity markets. We are certain that markets will strengthen over the long term. 

Are you facing redemptions in some of your schemes? Please elaborate on the recent trend in AUMs? 
Indian investors are maturing when it comes to planning their financials. To some extent, credit goes to the education efforts undertaken by various stakeholders including government, regulator, AMCs and distributors. 
More and more investors are adopting mutual funds as a route for investment and interestingly we have not seen redemption pressure during recent market corrections. Instead more monies were invested at every fall.