The Hindu Business Line : `Fiscal deficit is a big concern for us'

THE broad-based bull market that was seen in 2003-04 has now narrowed down. It has actually morphed into a stock picker's haven, says Mr Rajat Jain, Chief Investment Officer, Principal Mutual Fund.

The equity investor, according to him, must exercise extreme caution while choosing stocks, including the mid-cap plays that happen to be the latest fad. "Ultimately, a cautious investor is a happy investor", is his simple message.

Excerpts:

How do the broad contours of the equity market appear to you at this juncture?

Let's single out some of the key elements that have influenced valuations, beginning with corporate fundamentals. These look good at the moment, reflected as they are in the overall profitability figures.

Companies have gone through elaborate cost rationalisation programmes and have simultaneously gained from a demand-led growth. Today, there are fewer complaints with regard to capacity utilisation. Having said that, let me state that India still remains one of the major emerging markets, despite a few strong local peculiarities.

Flows into the Indian market may well continue in the days ahead. Please note that emerging markets were among the best performing ones in recent times.

What are your major worries at the moment?

Investors are obviously apprehensive that oil prices may spiral even from current levels. Our fiscal deficit has been ballooning, and that will continue to be a big concern for professional investors like us in future. Concerns such as these, along with others, will make a fund manager's job even tougher. I feel that it will not be so easy to make money from the equity market this year.

Why do you find `dividend yield' such a reliable concept?

Well, we think it is possible to locate good high dividend yield stocks even when the index is at the level of 5,000 or higher. If you observe the behaviour of dividend yield across various phases of the market, you may be surprised in a positive manner.

In a typical situation, the market may not expect too much from such stocks. However, even small triggers may unlock considerable value in them.

In contrast, the debt scenario has disappointed a large number of investors. Check out the debt market and you will sense an uncertainty, especially the fact that return potential is somewhat limited. That is not good news for debt investors. Some of them, including those who need the kind of capital appreciation that equities may provide, can actively think of adding high yielding stocks to their portfolios.

They should be looking for scrips that provide substantial dividend yield in relation to their market values.

Can you quickly name a few stocks of this nature?

I can think of names like Alfa Laval, Finolex, BPCL, Andhra Bank and Canara Bank. There are others, of course. At the end, investors may consider quality companies that plan to exploit growth opportunities. Such companies are often capable of throwing up a decent performance across bull and bear phases. Do remember that the universe of such companies is not static... if you dig deep enough, you should be able to add fresh names to the list from time to time.

Sectors like banking, chemicals, engineering may provide you with some reasonably good clues. The general idea is to locate the winning candidates ahead of competition.

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