Q: Some feel that because of how intense the pessimism on this market was, the unwind will cause us to rally a little bit more. Do you see that as well and by the end of this year, do you see this market at significantly higher levels from where we are trading?

A: Let me continue a little bit on the rupee. There seems to be a view going around that if you have capital account convertibility, then the exchange rate will go wherever it will go. There is very little historical basis for this for other countries. In other words, we can still manage the exchange rate and yet have capital account convertibility.

Both things are very desirable. You have capital account convertibility, so people can bring in money and take out money, which is very desirable. The RBI can manage the exchange rate as it has been doing, as Korea and Singapore are doing. China is obviously doing much more than anybody else. So, it is not as if only China can do it; several other Asian countries have been doing exactly this and are continuing to do this, even countries like Korea.     

Therefore, the idea that if you have the capital account convertibility, you cannot have an exchange rate that’s competitive is just false.

There is a question of whether the bearishness will spillover. I think that most of it is out. But the bear may have been sidelined for a few weeks. But I don’t think they have become extinct. There are still several people saying that the sub-prime effect will have a major effect on the US economy and will therefore have an effect on the developing economies, including India. I believe that they will be wrong on both counts.

I do not think the sub-prime will have that major an effect on the US economy. It will  slowdown, perhaps for a quarter and perhaps slowdown to about 2% from about 3% average.

It is certainly not a crisis and certainly not enough to affect other countries, including India.

So, I guess that bearishness might still give us a fillip the next month. Earnings, if they turnout to be decent, will be the basis for another fillip upwards. As far as the Indian market is concerned, even at these levels at 17,000, the forward PEs are something like 16 or 17. There has been no expansion in the Indian PE space for the last four years.

I think sometimes that expansion will come. Even if it does not come, because earnings are doing well, we will enjoy a robust stock market. But once that expansion comes, there will be another gap. So, there is a lot of inherent bullishness, fundamental based, fair bullishness in the market. One should not fight it. One can fight it on a trading basis, but really one should not fight it.

All in all, 10% from these levels is certainly very doable, which puts us around 19,000 by December. I think 20,000 is a nice round number that somewhere, sometime between now and March, is a 60% probability. So, it is not a bad bet. 

Q: From where we stand, if I ask you to split your portfolio between equity, fixed income and gold. How much would you give each?

A: Gold I will always give close to zero. It doesn’t make any sense, when the mother of all bull market is operating everywhere in the world, to have any weightage for gold whatsoever. You buy gold for Diwali and jewellery but certainly not as an investment. Fixed income, again for the same reason I have never been really a fan of fixed income. When the market has the probability of 50-50%, 50% going up and 50% going down, you should have some of your portfolio in fixed income. But not when the market has something like an 80% chance of going up. It has consistently done that for four years, this is the fifth year.

My advice to conservative investors is to be 100% in equities and within equities, you balance your portfolio with those that are relatively stable, those that are out of favour. So if you want to be conservative, you play it within the stock portfolio, not try and do that and try and do those. Either one of which, is liable to give you a few percentage points but not much more.

If you have to do it as a business because you are trader with a bank in fixed income, you can do it, but not as a retail investor. Retail investor should really be in equities. Within equities the retail investor as well other investors make their choices about how risky a portfolio to have.