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A Balancing Act
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Meanwhile, with Friday's budget increasing pressure on inflation he doesn't see the Reserve Bank of India (RBI) cutting rates in a hurry and therefore feels this could be an appropriate time for investors to build a good portfolio mix of equity and debt such that when RBI starts reducing the rates investors can expect a high double digit return from long term or dynamic income funds.
Excerpts from the conversation:
What has been your take on the budget? What impact will it have on the overall financial market including equity, debt, real estate and commodities?
As was expected, given the fragile state of politics the government did not come up with bold measures like allowing foreign direct investment (FDI) or reducing subsidy, yet not increasing the subsidy or not incurring a higher public expenditure is a positive. While FY13 fiscal deficit is projected at 5.1 per cent looks realistic as of now. The Rs 15,888-crore kept aside for further capitalising public sector banks will give a boost to corporate lending. The finance minister has done a fine balancing act by combining reality with attempted growth. The 7.6 per cent GDP growth, though not earth shattering will still put back the momentum into growth if achieved. The Rajiv Gandhi Equity Scheme is a good way to inculcate the culture of retail equity investing which help the markets increase depth and help corporates. The equity markets otherwise may be impacted for a few days or weeks because of the budget and may react with a few hundred points downwards movement but should pick up in due course. Debt will not be impacted because of the budget nor do we see real estate getting impacted. The fundamentals of the global economy and the Indian economy will change slowly and we do not see real estate rising after the budget. While for commodities, different commodities may react differently given the announcement in the budget, but these will be short-term movements. The major drivers in the long-term for commodities will remain unchanged.
Do you think the market can maintain this momentum even if liquidity drives and why? Will you be a buyer in this market and why?
The fundamentals have not changed dramatically and will change slowly. The budget did not have any bad news which is good news. If the government can come up with convincing steps to reduce the fiscal deficit and increase growth in the GDP, the optimism will start taking shape to sustain the markets, else the markets will remain rangebound or dependent on liquidity. This is a stock pickers market and there are stocks available at attractive valuation. We have been buyer at all times and we continuously look for ideas in the market and will deploy cash as we feel valuation have become more attractive.
Despite a rate cut of 75 bps, the market is still struggling for liquidity. What is your take on the RBI policy and your assessment of the Indian economy?
India is suffering from a structural inflation which is visible in the fact that the manufacturing sector inflation is almost at 7 per cent. We do not see the RBI cutting rates in a hurry and rates may remain high for some months. If at all a 25 basis points (bps) reduction is brought in by RBI, it may be more to appease the sentiment rather than anything else. Given the fact that the global economy is still not out of the woods, the RBI is doing a good job. The banks do not seem to be keen on increasing lending to the corporate sector thereby showing a cautious approach. Overall the Indian economy remains on a sound footing. If the infrastructure can be improved thereby helping GDP grow faster and if we can get the fiscal deficit down it will bolster the Indian economy much more.
What are your concerns for the Indian equity market?
A high level of inflation with low growth rate is a big concern. Elevated level of crude also remains a concern. We would also like to watch the government's action to allay fears of down of policy. Equally important is the revival of capital formation in the economy and getting the capex cycle invigorated. We would also keep an eye on the Euro crisis at regular intervals and the impact it can have on the Indian markets.
Do you think a time bomb is ticking in the global financial market with central banks across the globe pumping money in their respective economy? What is your view on the overall financial market? Do you think crisis in Europe as well as US behind us and why?
We continue to see a synchronized effort from global regulators and monetary authorities to contain the fall out of the 2008 financial crisis. Global liquidity is positive for the emerging markets in the short term and we believe the regulator in India will be in a position to control the excess and unwarranted liquidity if that comes to Indian shores at a level which is considered toxic. US economy has shown sustained recovery since the past 3 to 4 months. Europe seems to be in a bigger mess and we need to be watchful about the developments there. The concerns on the ability of some of the countries in the Euro-zone to meet their bond redemptions may hover for most of the months in the year.
In the current market condition where will you advise investors to invest? Currently where are you investing your own money? And why? (Can be real estate, commodities, gold or equity or debt)
Equities as a class can never be ignored especially if you are in an emerging market or in a economy which is riled by high inflation since equities are known to give better returns as compared to other asset classes over long periods of time. Investors should divide their money currently between equity and debt (debt since interest rates are higher and as and when RBI starts reducing the rates investors can expect a high double digit return from long term or dynamic income funds).
On the other hand, real estate given its illiquidity has to be a long-term investment. Apart from these three classes, investors should have a small allocation to gold which they should increase for the short term in case the geopolitical tensions in the Middle-East seem to rise or if they see a weakening of the US dollar.
I am following the same strategy as I have suggested above all my equity investments are in mutual funds since it is a convenient, transparent and low cost vehicle.
In your view what will be the next trigger for the Indian equity market? And why? And when do you see it coming such that we break the 18K levels?
Concrete steps by the government to ensure GDP growth and reduction of fiscal deficit can drive the market upwards. If government goes for policy intervention to revive and kick start the stalled reforms and displays an intention and is willing to bring back the growth to what is projected or higher, the market will rally to break the 18,000 barrier other than this, the trigger can be the beginning of serious rate cuts by RBI. Apart from these the global liquidity coming to India in bigger waves may also drive the market beyond 18000, but this is the least predictable.