The Hindu Business Line : Volatility may continue in the near-term: Geojit MD

Kochi March 29 With the market witnessing sharp volatile conditions of late, questions are being raised on market direction and factors that could impact it. Mr C.J. George, Managing Director, Geojit Securities, in an exclusive interview to Business Line, tries to answer the issues.

Is the volatility that we see in the market now a temporary phase or is it something that we have to learn to live with?

We will have to learn to live with the market volatility, and given the threshold limit of the index (14,000 at peak), ups and downs would be quite sudden and large. The Indian capital market, the Indian economy and Indian businesses are no longer insulated from global geo-political economic events. There is always some link to such global events that impacts market sentiments, capital flows, liquidity-related issues and as a result the valuation that one would give for investing in equities.

At present, the prime factors affecting sentiments are fears over rising interest rates, rising inflation levels and their combined power to throttle growth over a period of time. Global recession triggered from the likely slowdown in US and Europe coupled with some cooling off in the Chinese market are other significant areas of concern. In addition, Japanese Yen carry trade issue also had its adverse impact on global markets and India was no exception.

As these factors are still hovering, one can expect volatility to continue in the near-term.

What is your expectation on interest rate movements in the next one year? Is there a range beyond which the market could be impacted by higher interest rates?

There is a probability that interest rates may harden by one percentage point from the current level in the next one year. Indian corporates would be able to withstand such an increase without much tale-telling effect on their earnings. However, if inflation continues unabated from supply side constraints on the commodities side, the RBI may be prone to increase interest rates or tinker with CRR, SLR, Repo rates, etc, to suck out liquidity from the system to cool off inflation level. Obviously, such measures would impact the growth plans of corporates who rely more on debt-funding for their mega projects. Rising interest rates beyond 1 percentage point overt the next one year would impact profitability of companies. What are the factors that could potentially pull down the market or hold up its upward march in the near-to-medium term?

As we said earlier, events that triggered the downturn of the market are still very much in vogue. Level of inflation and interest rates movement in the US and other markets as well as in India would be key elements that would determine the course of the markets. As and when the US starts to reduce interest rates when inflationary fears subside — partly also from the lower growth syndrome — that could probably trigger funds flowing into the equity market and see an upward rally in the markets.

What are the sectors, in your opinion, that could turn out to be out-performers and under-performers over the next one year?

It is better to always do bottom-up research to pick companies that have capability to deliver profitable growth over the next 2-3 years and be able to invest at reasonable valuation. One should not be driven too much by fancy or fear for any particular sector to either over/under perform. However, given the emerging economic realities globally, it would look like the services sector, including information technology, ought to perform well. In a volatile time like this, when stakes are getting higher, it is preferable to take a medium-to-long-term call on investments. One year is too short a time horizon for discerning investors.

Do you expect mid-caps to join the rally with the large caps unlike the trend over the past one year when the rally was driven largely by the index stocks?

Yes, this might happen. Good mid cap stocks have a tendency to over-perform the market over the medium-to-long-term timeframe. This is because given their sound financials and business fundamentals, these stocks deliver superior earnings growth that goes to re-rate the stocks at times when index stocks are exhibiting signs of plateauing.

What is your projection for the market direction in the near and medium term?

In the near term, it is difficult to take a call on market direction except that one should be prepared for volatility.

However, given a medium-to-long-term investment horizon, one would reckon that most of the burning issues that disturb the markets in the short run would get resolved either way, with consequences felt across the markets.

Economies then tend to achieve dynamic equilibrium over a period of time and that process spells out the future course and magnitude of economic activities.

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