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Rasheeda Bhagat

K. N. Sivasubramaniam, Portfolio Manager, Franklin Templeton Mutual Fund

IT LOOKS as though there is no containing the party on Dalal Street. Equity analysts and market experts have been trying to caution investors, asking them to be careful investing in a market that had spurted about 70 per cent. But as 2004 dawned, with news of 8.4 per cent GDP growth in the July-September quarter, there has been greater optimism.

In this backdrop, for an outlook for stocks in 2004, Business Line spoke to two mutual fund portfolio managers who have, over the past decade, managed the top performing equity funds.

Mr Prashant Jain, Head-Equities at HDFC Mutual Fund, says that it is "extremely difficult to forecast the markets over short to medium time frames. But over long periods, the market returns will be nearly equal to the growth in profits over that time." He feels the market is no longer undervalued, as it was a few months ago, with the present P/E multiples being around 15 (based on expected March 2004 earnings), unlike P/Es of 8-10 six months ago. Now on, the index should perform more in line with profit growth, and the market's re-rating potential is more modest, he says.

Hence, equity will give "reasonable returns" over the medium and long term, "but the pace of returns witnessed over the last few months is unlikely to be sustained." He says the market has been driven by the growth in profits.

"With the short-, medium- and long-term growth prospects of the economy being very good, this should sustain the market over some time. Compared to a few years ago, corporate leverage is very low. This makes growth less risky and, to that extent, we are on a better footing." Cheaper loans are spurring consumer demand, and that supports growth, along with power reforms and ongoing road projects.

Prashant Jain, Head, Equities, HDFC Mutual Fund

Raising an important point on wealth accumulation, he says he finds that "unfortunately, most investors are spending much of their effort trying to either time the market or to figure out what to buy. Unfortunately, the answer to the most important question that impacts wealth is seldom sought, and that is: How much to invest in equity," says Mr Jain.

Five years down the line, he says, the movement of 200-500 points in the Sensex will appear very small in an index poised at a much higher level. Therefore, timing will not have a material impact on one's wealth. He thinks there will not be too much of a difference in the performance of the majority of funds over five years. "What will make a tangible difference to one's wealth is asset allocation, which is within the investors' control."

Giving an illustration, Mr Jain says whether one invested at an index of 3000, 3200 or 3500 a few months ago, has a relatively marginal impact on wealth today, when the index is at 6000.

"Similarly, which shares/funds one bought also has less impact as long as the portfolio was well diversified. But what is making a large difference to one's wealth toady is how much money one invested in equities — 10 per cent or 30 per cent or 60 per cent of one's wealth. The same logic will apply five years from now.

The message is very simple — focus on asset allocation, find few good funds that enable you to achieve your target, and review your asset allocation periodically."

An investor who does not need a portion of his wealth in the next two years can put it in equity because he can afford a moderate depreciation, to which equity is always susceptible, in the short/medium term. "The message, then, is that long-term investors should invest even at present levels and short-term investors should avoid equities.

Investments should, however, be phased out over a number of instalments, and each instalment should be invested at a different index level. This will reduce the chances and magnitude of a loss, should the market correct," adds Mr Jain.

Top five picks: Declining to name individual stocks or funds, he says that investors often make the mistake of evaluating MFs on the basis of returns in the immediate past and that too over short periods of time. "This is an incorrect approach and may result in improper selection. Investors chasing high returns in 2000 ultimately ended up with significant losses!"

So, evaluate a fund by its performance during a 3-5 year period, as also through bullish and bearish phases.

"Funds that have done better than the markets in both good and bad times are better in my opinion, than funds which do better over one phase of the market only."

The view from Templeton

Mr K. N. Sivasubramaniam, Franklin Templeton's Portfolio Manager, feels that in terms of basic fundamentals, all the indicators are positive. "The last quarter GDP numbers that came out on December 31 caught most people by surprise. So we will see economists upgrading numbers and this should reflect in better corporate profitability for this year."

On the equity market having run up already, he says, "We've had a euphoric market in 2003, so most of the undervaluation that existed at the beginning of the year does not exist any longer. Going forward, the equity market will track actual corporate profitability growth, and move in line with corporate profits."

On whether he feels the stock market is adequately valued at the beginning of the new year, he says: "Yes, in the sense that the undervaluation is gone. So moving forward, the equity price movement will depend more on the top-line and bottom-line of companies."

Asked what individual investors do at such times, particularly those who have burnt their fingers in the past and had moved away, but are feeling tempted once more, Mr Sivasubramaniam says: "Frankly, I think that most investors who had come into diversified equity funds at any point of time in the last two years would not have lost much money in these two years."

This holds true even for those who had invested during the highs of 2000, because most diversified funds are up by at least 50 per cent. So there was not much chance of anyone losing money there.

As for those who had gone into sectoral funds, such as technology funds during the 2000 boom, he says sector funds are not meant for lay investors. "They are only meant for people who think they understand the sector. So, any equity investor who wants to enter the stock market, should clearly understand that equity at any point in time — when the market is at a bottom or overheated — definitely carries a risk.

"He should do a proper asset allocation and if he has a long enough timeframe in mind, equity will definitely outperform most asset classes."

On zeroing on the right mutual fund schemes in a market flooded by MFs of all hues, Mr Sivasubramaniam says that investors should seek assistance from financial advisors who can guide them on where to invest.

"Some of the things they could look at are the track record and size of the fund and the kind of stocks it invests in."

He adds that the profit-booking concept will differ from investor to investor.

"A financial advisor will do a proper asset allocation in which equity will probably form a part. Whether it is small or big will depend on the individual investor.

"If he has been investing for a long time, the investor should maintain his holding unless he needs to withdraw the money for some reason, in which event he can get out. Or if the market seems overvalued and he faces some other risks, then he can take a call."

On how sure he was that this time around there was no scam in the making, Mr Sivasubramaniam said: "I think there is enough and more being done in India to make the market a safe place for retail investors.

But in any market-driven society you will have issues cropping up now and then.

"How you deal with them when they crop up is very important rather than stopping them, because something may happen which is totally out of the blue and which you might not have anticipated. As far as regulations are concerned I feel our market is the best regulated in the world today."

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