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Speaking to Businessworld, Reddy says it's a drag market and agrees that there isn't much appetite for equity following high valuation and unfavourable macro economic indicator. He, however, isn't much worried about what happens in the Europe and US as he feels the Indian market will eventually be driven by what happens to our growth, specifically corporate profit growth. Reddy is of the opinion that Indian market will move sideways within a narrow band over the short-term, as there are no significant catalysts to move it sharply in either direction.
Though he agrees that given the environment, investors should avoid equities, but at the same time, says it will not be prudent to ignore this important asset class because of uncertainty in the short-term. He feels it is extremely difficult for retail investors to predict market movements and they should opt for systematic investments in equities over a long term, particularly given that equities have become attractive after performing poorly for almost five years now.
Excerpts from the conversation:
How do you view the impact of the S&P downgrade on the Indian economy and equity markets?
What the rating agency has done is bring forth all prevailing issues into their opinion to make it current – as such there has not been anything new or unknown that the market has discovered. Equity markets have underperformed for the last two years, notwithstanding the growth in economy, essentially for the reasons highlighted by the rating agency. However, it might have an impact on policy makers and if indeed some positive actions come forth on fiscal consolidation etc that will be a good outcome.
Despite a rate cut why is the market not reacting positively? What are your concerns for the Indian equity market?
Yes, the market has not really reacted positively to the much expected reversal of rate cycle. The accompanying central bank's commentary indicated that the likelihood and extent of further cuts could be much more moderate than what the market would have liked. The concerns plaguing the market are a slowdown in economic growth, particularly weak capital spending by the private sector, and therefore anaemic corporate earnings growth and the need for lower interest rates. In addition, negative surprises on the policy front in several areas have also dampened investor risk appetite.
What is dragging the market and what is your overall view on the equity market for the next three to six months?
The market is struggling with near-term issue of slow economic growth with high interest rates on one hand, and the longer-term prospect of reverting back to higher growth on the other. We are of the opinion that the market is likely to move sideways within a narrow band over the short-term, as there are no significant catalysts to move it sharply in either direction. Inflation falling on a consistent basis, with a possible fall in oil price could be a catalyst to move the market higher. On the other hand, negative surprise to forecast 7 per cent growth rate in FY13 with inflation persisting at high levels can take the market lower.
What is your view on the overall financial market? Do you think the crisis in Europe as well as US is behind us and why?
Europe and US would influence our market through the impact of capital flows rather than in any fundamental manner significantly. The critical question is whether there is any systemic risk to the global financial markets which can adversely impact capital flows. It appears that given the recent interventions by policymakers, the likelihood of such a systemic event is very low. Our markets will eventually be driven by what happens to our growth, specifically corporate profit growth.
In the current market conditions where will you advice investors to invest? (Any short-term strategy)
While high interest rates and sideways movement of equity markets will naturally tempt investors to avoid equities, it will not be prudent to ignore this important asset class because of uncertainty in the short-term. Since it is extremely difficult for retail investors to predict market movements it will be arduous for them to forecast when equities will start performing. We recommend systematic investments in equities over a long term, particularly given that equities have become attractive after performing poorly for almost five years now.
Were you surprised with RBI cutting 50 bps in the last monetary policy? And why? Despite rate cuts why is the market still struggling for liquidity?
The RBI move was a surprising one, the reaction was not as absolutely positive as it may have been due to the accompanying hawkish commentary of the central bank stating that inflation is still a major concern and the extent of further rate cuts could be small. The liquidity deficit is on account of several factors including possible liquidity drain on account of the central bank's intervention in the currency markets and a weak deposit growth in the banking system relative to credit demand.
What is your assessment of the Indian economy?
We are optimistic about long-term prospects of the economy. The economy has had a phenomenal decade of 2000s where significant changes happened across several sectors which created numerous opportunities for investors. The growth rate had picked up from 4-5 per cent to 8-9 per cent, prior to the recent cooling off. We expect the future to be good with high single digit growth rate on an average. However, given natural vagaries of an economic cycle, the markets will see years of bullish trends accompanied by years of bearish markets and investors should learn to take it in their stride.
At ICICI Prudential Life Insurance what has been your current strategy of investing in equities?
We are a net inflow company and the quantum of flow varies. As a policy we always maintain a well diversified portfolio with exposure to major segments of the economy. We are currently somewhat cautiously positioned on some capital goods sectors where there is over-capacity, some commodity stocks which are exposed to the global capital expenditure cycle and certain highly valued domestic discretionary consumption stocks. We are largely sector or market cap agnostic – our investment decision is a combination of fundamentals and valuations. However because of the size of our portfolio, we invest in small cap companies more by exception.