The Hindu Business Line : ‘It may take 2-3 years to break previous high’

Chennai, Aug. 10 Equity markets across the globe have been volatile due to firm interest rates, soaring crude prices and raising inflation. The ABN AMRO Asset Management Chief Investment Officer, Mr K.C. Reddy, shares his view on markets and his funds’ performance.

Excerpts from the interview

What is your view on the Indian markets and what are the key concerns at this juncture?

The markets are likely to stay range bound in the short term with an upward bias and are unlikely to move beyond 5000 for the Nifty. There will be a slowdown in earnings front for most of the companies and they will not see the growth rates that were witnessed over the past few years. Apart from that any unprecedented development in the domestic front will also be a key concern for the markets.

Do you foresee any possibility of the indices crossing their previous highs over the next 12-18 months?

In next 12-18 months, the market may come close to the previous high, but they will definitely take 2-3 years to touch a new high. Having said that it is possible that some sectors and stocks have the potential to reach new highs. The benchmark is dominated by large-cap stocks and it is unlikely that all the companies will perform very well.

What is your call on interest sensitive sectors such as banks, auto, capital goods and real-estate?

We are bullish on banking and infrastructure stocks and these have the potential to touch new high irrespective of the market direction. We are less bullish on auto and real estate. But even if they don’t hit new peaks, they have potential to deliver good returns. Capital goods is already witnessing a slowdown. But as we are very close to a peak interest rate situation, we assume the slowdown in capital goods is temporary.

Which are the companies which may be more affected by the interest hike?

It could be large or mid sized companies, based on the leverage and cash position of the company. For the cash rich companies, the impact will be limited. In any case, there are bright chances for interest rates to come down by next year.

Will the good monsoon and substantial correction in crude oil prices result in a lasting revival in the markets?

For the revival of the market, the global economy and commodity prices will be key factors. Already we were witnessing a correction in the commodities space. Due to bullish trends in commodities, capital goods and auto sector were under some pressure in recent times. Any slowdown there is welcome relief for both these sectors. We expect improvement in the profit margins for both the sectors. Auto will benefit from lower prices of steel, aluminium and copper. But competition within the sector will put pressure especially on car manufacturers’ margins and this segment may not be major beneficiary, on a net basis.

Mutual funds are aggressively coming out with fixed maturity plans. In some cases, the indicative yields are 11-12 per cent. Do you think this return is sustainable for next two –three years?

We think that conservative investors should stay away from equity for some more time. If some one offers 11-12 per cent in an FMP, people still can take but these returns will certainly not be sustainable down the line.

We expect yields on 10-year paper will come down and this will be the bigger risk. If you are a long term investor, equity valuations appear good; only market sentiment is bad. If one is ready to wait, equity has the potential to deliver better returns than debt.

Some of the ABN AMRO equity funds have underperformed peers on a one year basis. Any specific reasons for this?

I joined here in June; most of our funds performed well in 2006 and 2007.

In the first half of 2008, our funds suffered due to overweight positions in some sectors and stocks, our exposure to mid-cap stocks also weighed on returns. But in July, we restructured our funds and if you look at the performance for last one month, it has improved and we have managed above average returns. It is a very short period to comment aboutWhy did most of the fund managers after such a strong rally in the last quarter of 2007 fail to book profits and declare dividends?

You may be right, we could have done that. But people expected a correction to the tune of 10 -15 per cent and that is what appeared logical for a market that had such a strong rally.

Nobody expected such a sharp increase in interest rates and inflation within such as short period. But markets were a bit irrational; it is difficult to judge the market movement over short periods of time.

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