Below is a verbatim transcript. Also watch the accompanying video for more.
Q: Overall what is the expectation in 2011? Would you say that the market will be able to notch up 15-16% next year like it did this year or does it distinctly look a tougher year?
A: Where we started of in 2010 and where we are starting of now in 2011 appears to be similar. Corporate India is in good shape. The banking system is in good shape. The overall mood is reasonably positive on the economic side. Where we are different now, I would say compared to one year back is that today we have a situation where there seems to be continuous short fall of liquidity on the debt market side.
When I look at equity markets I find everything is fine. I mean you have had huge selling by locals over the last one year. Obviously you are not going to see this kind of selling in the next year because whoever wanted to sell out has sold off. From hereon we actually think there should be net inflows from Indian investors.
But on the debt side what’s happening is that every month we are seeing CD rates continuously going up of banks on a one year basis. The deposit growth doesn’t seem to be going up at all and part of it is maybe because of government balance with the RBI.
Nevertheless, the debt market will hold the cue to equity markets and if interest rates keep going up the way they have been going up, there are fairly big headwinds on the equity side. Particularly, if there is even a percent rise from here, there is a fair amount of headwind on the equity side.
Q: So you don’t want to venture and say something in terms of a possible percentage gain even in the first half? Will gains be maintained or do you see downsides and if you do what kind of downsides?
A: What I am kind of certain about is that 2011 will be a more volatile equity market compared to 2010. The international reasons for volatility particularly from Europe remain and local reasons will be because of the kind of interest rates which prevailed in the Indian economy.
What I am quite sure of is volatility but as far as market returns go, its not very clear whether 2011 looks worse than 2010 or not because if you finally see in 2010, barring China and Brazil, most of the other markets have delivered very good returns. This was not expected in 2010 when people said the US will not do well on the market side.
But if you see the kind of rally we are seeing since September, it’s pretty significant in the US. We have had a situation where many global markets, most commodities and even gold has done well.
There doesn’t seem to be a situation at this point in time where people are saying that the US will tighten and therefore you will have a situation where all risky asset classes will underperform vis-à-vis other things. From that point of view I don’t think we are in a bad situation in anyway but having said that we are very clear that volatility will be high.
Q: In the equity markets where would you hide, would it be in IT which is less prone to the interest rate headwinds? Really what sector do you think could be the flag bearers in the first half?
A: Where we possibly have increased weightages would certainly be in commodities, especially in many metal stocks. We have held on to our weightages in most of the regulated utility stocks. There are stocks in oil and gas which are not going to get adversely affected by increases in oil price.
We have actually seen situations where many of the sectors there have opportunities. The problem lies in over debt sectors, where the interest costs can go up. That’s where we have to be much more stock specific. We have to look at what is the leverage of a company and what kind of increase in interest costs you are going to see in that company. Those are the places where we have been a bit more careful about.
Q: There is a theory that a lot of the existing mutual funds and investors as of 2010 were those who probably entered in the big wave of NFOs of 2007 and the heady stock markets of that time and they probably were waiting to get at least at par levels to get out. Do you think that out of this catharsis could emerge some kind of improved or increased participation of the small investor in mutual funds?
A: A dramatic improvement is certainly on the cards because I don’t think we are going to see net outflow as what we have seen this year. That itself would be a dramatic improvement in 2011. Slowly investors will come back again into the mutual fund market.
Mutual funds have been very good because if you see any of the big up months like September, we have seen huge redemptions and in any down month we have seen inflows. The three down months of the years were January, May and November and in all the three months we have seen inflows.
Investors have got it that equities are a volatile asset class which you have to invest on downturns and take out when there are spikes. They seem to have got it after 2008 very well. That’s why I believe that 2011 will be the year where investors are making money in mutual funds. Definitely, the combination of both debt schemes and equity schemes is going to see solid retail money into 2011.
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