Ved Prakash Chaturvedi, chief executive (capital markets & investment management group) at L&T Finance Holdings, believes that the recent persistent increase in interest rates has started impacting the business sentiments and growth rates. He tells Nitin Shrivastava and Neelasri Barman that though we may see some slowdown in growth, but the growth differential which India enjoys over its developed counterparts would ensure that foreign inflows resume once global risk aversion declines. Edited excerpts:
What do you make out of current range bound market movements?
Indian equity markets are reflecting the uncertainty witnessed in global economies. Developed economies have been facing macro headwinds in the form of stagnation, under employment, over-leveraging and consequent social and economic issues. Similarly, our own economy has been beset with high inflation, high interest rates and slowing expected growth rates. Given these concerns, investors will have to brace up for volatility in the near term.
How do you see corporate earnings this quarter?
Global macro headwinds, high domestic inflation, interest rates and other socio-political issues have somewhat depressed business sentiment and investment climate in India. Thus, it is expected that there will be some slowdown in growth rates of corporate earnings in the ensuing quarter. This may prompt a rethink on the upward bias for interest rates which we have seen in the past.
How will slow growth impact the foreign flows into India in near term?
Even if growth rates in India slow down marginally, the expected economic and corporate growth here could still be significantly above what is being experienced in the developed economies. This differential in growth rates could ultimately result in greater stock market value creation in emerging markets like India. As a corollary, global fund flows should get attracted towards these greater value creation opportunities in India and other emerging markets over a period of time. Since a significant percentage of global wealth is still deployed in stock markets of developed economies, this transition of wealth deployment from developed markets to emerging markets will happen over several years, may be decades. We are witnessing the early part of this transition period with its concomitant flux and volatility.
Experts feel valuations are quite attractive at the moment. So what's holding FIIs from investing now?
Owing to past familiarity and experience with their own markets, perception of high risk in emerging markets and general lack of in depth knowledge in these new markets, the shift of capital deployment from developed markets to emerging markets is only gradual. If we look at the past decade, India and emerging markets' share of global institutional investor deployment has certainly gone up. However, in proportion we are still an extremely small percentage in global assets. Hence, as conviction in our sustained growth rates is gradually reinforced we may see more inflows over a period of time. In the near term, volatility and flux will keep large investors tied to more familiar territory of their own markets.
How do you see inflation and interest rates spanning out in near term?
We have now seen high inflation rates for some time in India. Owing to the base effect and also because of bountiful monsoons, economists expect gradual decline in inflation rates in the coming months. High interest rates are now a significant concern for business sentiment and business growth rates. Thus, the expectation is that we are nearing the peak of the interest cycle and while we may still have another hike or two in interest rates by our central bank, 2012 is expected to be year when interest rates can decline.
Which are the themes or sectors where you see deep value emerging?
India has always been a story of high quality performing companies which have created value for patient investors. We have been through a period of increase in interest rates, consequent impact on interest sensitive goods offtake and impact on the investment climate. Thus, firms directly impacted by these developments have underperformed while companies which are asset light and not interest rate sensitive have outperformed in the last few years. We have seen this pattern in several earlier market cycles. Past experience indicates that there are particular sectors that perform in these individual cycles. Over the last 15 years there is evidence to show that well managed companies with high ROCE and good corporate governance outperform others.
On debt side, which products can offer decent returns in the near term?
As mentioned earlier, we may still see some more upward bias in interest rates and hence investors need to be careful. However, since interest rates are expected to come down in 2012, long bond funds, gilt funds may benefit patient investors.
What kind of asset allocation should an average investor stick to?
We always advise investors to assess their risk appetite and invest in an appropriate portfolio mix. For a middle class person who is in mid 30's, a good asset allocation could be about 70-75% mix of mid and large cap equity funds and remaining in fixed income-oriented funds. This is provided the investor has a patient medium-term view and is prepared to accept the volatility associated with equity prices. For investors, who are not familiar with equity and fixed income markets, systematic investing through SIPs is recommended.
What do you make out of current range bound market movements?
Indian equity markets are reflecting the uncertainty witnessed in global economies. Developed economies have been facing macro headwinds in the form of stagnation, under employment, over-leveraging and consequent social and economic issues. Similarly, our own economy has been beset with high inflation, high interest rates and slowing expected growth rates. Given these concerns, investors will have to brace up for volatility in the near term.
How do you see corporate earnings this quarter?
Global macro headwinds, high domestic inflation, interest rates and other socio-political issues have somewhat depressed business sentiment and investment climate in India. Thus, it is expected that there will be some slowdown in growth rates of corporate earnings in the ensuing quarter. This may prompt a rethink on the upward bias for interest rates which we have seen in the past.
How will slow growth impact the foreign flows into India in near term?
Even if growth rates in India slow down marginally, the expected economic and corporate growth here could still be significantly above what is being experienced in the developed economies. This differential in growth rates could ultimately result in greater stock market value creation in emerging markets like India. As a corollary, global fund flows should get attracted towards these greater value creation opportunities in India and other emerging markets over a period of time. Since a significant percentage of global wealth is still deployed in stock markets of developed economies, this transition of wealth deployment from developed markets to emerging markets will happen over several years, may be decades. We are witnessing the early part of this transition period with its concomitant flux and volatility.
Experts feel valuations are quite attractive at the moment. So what's holding FIIs from investing now?
Owing to past familiarity and experience with their own markets, perception of high risk in emerging markets and general lack of in depth knowledge in these new markets, the shift of capital deployment from developed markets to emerging markets is only gradual. If we look at the past decade, India and emerging markets' share of global institutional investor deployment has certainly gone up. However, in proportion we are still an extremely small percentage in global assets. Hence, as conviction in our sustained growth rates is gradually reinforced we may see more inflows over a period of time. In the near term, volatility and flux will keep large investors tied to more familiar territory of their own markets.
How do you see inflation and interest rates spanning out in near term?
We have now seen high inflation rates for some time in India. Owing to the base effect and also because of bountiful monsoons, economists expect gradual decline in inflation rates in the coming months. High interest rates are now a significant concern for business sentiment and business growth rates. Thus, the expectation is that we are nearing the peak of the interest cycle and while we may still have another hike or two in interest rates by our central bank, 2012 is expected to be year when interest rates can decline.
Which are the themes or sectors where you see deep value emerging?
India has always been a story of high quality performing companies which have created value for patient investors. We have been through a period of increase in interest rates, consequent impact on interest sensitive goods offtake and impact on the investment climate. Thus, firms directly impacted by these developments have underperformed while companies which are asset light and not interest rate sensitive have outperformed in the last few years. We have seen this pattern in several earlier market cycles. Past experience indicates that there are particular sectors that perform in these individual cycles. Over the last 15 years there is evidence to show that well managed companies with high ROCE and good corporate governance outperform others.
On debt side, which products can offer decent returns in the near term?
As mentioned earlier, we may still see some more upward bias in interest rates and hence investors need to be careful. However, since interest rates are expected to come down in 2012, long bond funds, gilt funds may benefit patient investors.
What kind of asset allocation should an average investor stick to?
We always advise investors to assess their risk appetite and invest in an appropriate portfolio mix. For a middle class person who is in mid 30's, a good asset allocation could be about 70-75% mix of mid and large cap equity funds and remaining in fixed income-oriented funds. This is provided the investor has a patient medium-term view and is prepared to accept the volatility associated with equity prices. For investors, who are not familiar with equity and fixed income markets, systematic investing through SIPs is recommended.
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