The Hindu Business Line : Many fund managers believe valuations are quite fair

Stocks are again nearing an all-time high, supported as they are by international cues propped by robust fundamentals on the domestic front. Equity funds’ net asset values have been on the rise, the trend evident from the performance many of them have clocked in recent times.

Fund managers, by and large, are talking excitedly about mid-caps and small-caps, although many of them feel valuations are currently quite fair in a rising earnings growth scenario.

However, bang in the middle of this buoyant state of things are signs that some say could lead to a climb-down of sorts. Investors, it is argued, should appreciate these scary factors – right away, well before the positive trend starts getting reversed.

Scary factors

“What are these factors?”, you may well ask. Well, the progress of the monsoon is one. As always, this will be closely watched. Some of the other major issues that the market will look out for are inflation figures and the rupee-dollar rate. These may well have an impact on the strategies that the Reserve Bank of India is likely to pursue in the days ahead.

Yet, for all the doubts that are being expressed, an influential section of the fund management community is underscoring the fact that the broad corporate earnings trend witnessed last year will not weaken immediately. Fiscal 2007 had indeed – to use a classical term – ended on an upbeat note. India corporates clocked a 25-per cent-plus increase in revenues. Profits grew handsomely.

This, nevertheless, does not necessarily mean that the first quarter figures (in the ensuing results season) will be quite as good. A few critical segments of the economy, such as auto, have seen some slowdown. This has led a number of fund managers to suggest that the earnings momentum may be a bit disturbed this year. Giving credence to this view is the concern that there will be a fuller impact of recent interest rates changes.

Diversified funds

How are diversified equity funds doing lately? Let’s check out some stats. If you consider three-month numbers, diversified funds have given about 18 per cent. Banking funds – their performance has been remarkable in the past whole year – have been the top draws, thanks to the 25 per cent-plus returns they have delivered. We are referring to scores set by Value Research pertaining to June 29.

The one-month scenario, incidentally, is again dominated by banking funds, which have given roughly six per cent. Pharma funds too have not done too badly, 5.6 per cent or so. Auto sector turned in a negative show in recent weeks.

Now, where does all this leave debt? Debt funds, especially the longer term ones, are nobody’s children, it seems. Investors are focusing largely on the shorter end of things. We will discuss the trends on this front in another column.

However, let us just end this one by saying that that fund houses are still strong on FMPs. A good number of fixed-maturity products are being worked out by players that are fighting hard to keep investors away from bank deposits.

Feedback may be sent to nilanjan@thehindu.co.in

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