The Hindu Business Line : `Markets will tend to be more volatile than ever before'

"Investors would have to live with this volatility, whether they want it or not", he added when Business Line sought his views on the declining stock prices. He also talked about strong "investment themes" - outsourcing, capex cycles and the like - that should propel the Indian story ahead.

Excerpts.

The equity market has suddenly seen a sharp decline. How do you read this?

The run-up in the Sensex from the level of 7700 to 8700 or so was sharp and furious. At around those levels things were looking quite uncomfortable - especially seeing the extent of market participation, with anything and everything moving up.

Valuations were not very expensive though they were not very compelling either. The prime trigger that drove the indices up was the huge liquidity gushing in from the FIIs.

A change in the dollar-rupee equation brought about a correction. This was indeed necessary.

We are also witnessing some money moving out of emerging markets.

Is this the beginning of the end of the bullish phase? Or, is this temporary?

In terms of metrics, markets are trading at 18 times trailing 12 months' earnings, 14.5 times fiscal 2006 earnings and 12.5 times fiscal 2007 earnings. Considering the fact that results announced by corporates so far have been good, there is no reason to believe that the India story is over.

Also the fact that around 65 per cent of the total market cap caters to the domestic demand and is not dependent on exports as in the case of other emerging markets, gives rise to the feeling that the bullish phase is not yet over.

Given the fall, the markets may take some time to consolidate in the short-term but the medium- to long-term direction looks certainly up.

Should the recent decline prompt investors to buy? Or, should they exit, at least partially?

Investors would do well if they stick to strong businesses. They must also understand that with the increased participation from global players, Indian markets would tend to be more volatile than ever before.

Investment themes like outsourcing opportunities in areas like information technology and auto components, capex cycles and increasing purchasing power in the hands of consumers would continue to drive the India story forward.

Investors should buy into these themes on declines and sit on them. At the same time, companies with weak businesses and poor earnings visibility should be ones where one could consider exiting.

What should an ordinary investor do in the face of such volatility?

As we said before, our markets would be more volatile than they had been earlier. If you are an investor here, you would have to simply live with this.

We are seeing an increased number of participants both domestically and overseas. In times of such increased volatility, investment in ideas where thorough research has been done is the only way to go about it.

In case individuals are not able to do the research themselves, they should seek professional help.

What can stockbrokers look forward to by way of policy direction?

The policy initiatives announced by the Government so far have made Indian markets more transparent and investor friendly.

Further improvement in areas of corporate governance and disclosures would help in increasing transparency within the system. This would benefit investors too.

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