From this Diwali to next: Pundits' market outlook

Q: I think your investors would have made a lot of money in the last 12 months. Do you think the good cheer can last for the next 12 months?

A: I think it has been a complete seesaw change from what we saw over the last Diwali. If you see, we are back to 2007 levels as far as the index is concerned. So, from 17,000 down to 8,000 and back up to 17,000. I think what it proves is that obviously in an emerging and fast growing countries like India, there are going to be shocks, some internal, some external. Long-term investors ultimately end up making money. So, I think this has been a lesson for long-term investors. Those who have stayed on are definitely looking at some decent gains.

Q: Along with being the year of surprises, this has been the year of the left-out. For people who want to get into the market are you feeling confident to tell them to come in now?

A: Actually, it has always been a case of either being left out to buy or sell. That is what the stock market has been teaching us from time to time. So, even now, I think a lot of people say that this has been the most unloved and unbelievable rally as far as the equity market is concerned for a long time. It has been one of the most sharpest rallies, we have seen the index nearly double in the last seven-eight months. So, obviously that feeling of left-out is going to be there. It is a very difficult call for anyone to say that you have to invest now. But what we have always advocated and will continue to advocate is that India is a country that is going for the next five-seven years at upwards of 8% compounded annual growth rate (CAGR). There will always be some concerns in one or two years. But that is fine.

For individual investors, I think a systematic investment approach is what would work best for us. Obviously, at this point, we have seen and heard a lot of comments and even we feel that fundamentally markets are not cheap from a near-term perspective. But if you start discounting the fact that there is definitely growth going to come, I think investors from these levels will definitely end up making decent returns.

Q: The one thing that has happened is that as the market kept on climbing over the last many months, we didn't see too much money coming into mutual funds. Is it because people were sceptical to join the race late or is it because of some quirk in the mutual fund or distributor fee structure? Generally, what has kept people away because we haven't seen huge incremental money, a market which has risen this fast might suggest?

A: It is a combination of a lot of things. One thing is that in the last 18 months, the kind of scare and the kind of events that we have seen in the global economic arena has been unprecedented. No one would have thought that Lehman Brothers and Citi and Bank of America and Merrill Lynch all together would have some kind of an issue in terms of just going belly up. The kind of distress and fall that we have seen in a lot of asset classes, whether it be commodities or real estate or equities has been something that has really scared investors.

Then you have a second set of investors who started to invest somewhere in mid-2007 and went on investing till early 2008. Those set of investors are seeing that now they are basically nearing their break-even and there is a natural tendency for these sets of investors to sort of book whatever they had in terms of investment, atleast for the time being.

The third thing obviously is that there has been a regulation change. The regulation change would be probably beneficial for the investors in the long run. However, the short-term impact is clearly being felt. So, I think it is a combination of all these three factors. From our perspective, what we feel is that once the market stabilises - and what I mean by stabilisation is that it will sort of consolidate at a particular level and I think that is the time when you start seeing investors getting some confidence and coming back into the equity markets. We are very hopeful that with the kind of savings rate that India has and the fact that for the last two years we have nearly USD 500 million of accumulated financial savings, of which none has come into mutual funds, there has been some inflow through the insurance route. But the exposure of retail investors again to equity markets has come down quite significantly. So, it is a matter of time before that flow starts to come in through the mutual fund route as well.

Q: If you take a near-term approach, tactically what would it be? Would you play defence and start increasing the cash you've got going in your portfolios or are you going with the flow right now?

A: I think there has been a dramatic change in our strategy. We were in a significant amount of cash all through 2008 and even towards the first quarter of 2009. Somewhere between March and May-June we deployed nearly half of the cash that we are sitting on. Right now, what we are trying to basically do is that fundamentally we see that the market is definitely fairly valued. But there are pockets where there are opportunities. The technical factors are also in favour of the market moving up. What I mean by technical is not only charts, but the fund flows, the interest that India is attracting as an investment decision, the low inflows from the domestic side, which has come into the equity markets and which is waiting to come into the markets.

What we are trying to do is investing in stocks and sectors that we like and trying to hedge our positions by using options to the extent that at least on a sharp fall, we would be hedged to a certain extent. So, rather than creating additional cash, we use more options and trying to balance our fresh purchases with some hedging strategies. So, I think that has been a change in our policy, from say the first quarter of 2009 till now.