Is the recent streak of good returns on long term debt funds likely to be sustained? Should investors look to stocks even as the domestic economy slips into moderate growth? Mr Prashant Sharma, Head-Investments at Max New York Life, takes a few questions from Business Line on these aspects. Mr Sharma manages funds worth Rs 5,000 crore for the insurer and has been associated with Max New York Life for seven years.

Excerpts from the interview:

Between equity and debt, which investments do you think will perform better in 2009?

On the debt side, the interest rates in the Indian market have been quite attractive compared to the rates prevailing globally. A US 10-year government bond has been trading at 2-3 per cent whereas Indian 10-year government bond was at over 9 per cent a few months ago.

Hence, there was a significant difference in sovereign paper yields even after accounting for currency volatility.

With the widespread expectation of interest rates coming off in India in response to the falling inflation, there was a significant opportunity to make capital gains on a bond portfolio. One could have made close to a 20 per cent return on a zero credit risk portfolio over the last 3-4 months.

However, having said that, our view is that a good part of the interest rate easing cycle on the government bonds has already played out.

On the equities side, the valuations of equity markets have already corrected in line with expectations of moderation in growth forecasts. As reduced interest rates get passed on to both corporates and individual consumers, we think it will provide good support to India’s GDP growth.

As GDP growth starts showing signs of a pick up, money flow will increase in favour of equities. Thus it is fair to assume that equities would outperform debt in the medium and long term. But taking such calls for a one-year period is quite difficult.

What is your take on current Indian market valuations? There is a view that though PE multiples look cheap on a historic basis, they still don’t discount the worst-case scenario on earnings. Do you go with this view?

Though there is a widespread view that corporate performance would be rather sluggish over the next year, the market outlook over the medium- and long-term period looks good.

The economic turmoil that we are living through currently is neither the first time nor the last time that this has happened. Yet, for each of us who are experiencing it, there is a certain anxiety about whether it will end.

One cannot predict the market or rule out further market dips, but India being primarily a domestic economy, we think the economy should react more favourably to the various fiscal and monetary actions taken by the RBI and the Government.

With both inflation and interest rates having come off quite significantly in the last couple of months, we think that this would provide a good support to the India growth story and the equity markets would start reflecting that over time.

Which stocks and sectors, in your view, will best weather the macro challenges of 2009 and deliver reasonable earnings growth?

The domestic consumption sector and the banking sector, which are both direct beneficiaries of the falling interest rates and dropping commodity prices, are expected to outperform in the coming year.

What is the proportion of cash that you now hold on your equity-oriented funds, if any? Will you be fully deploying this in 2009?

On an average we have been holding 15-20 per cent cash in our equity-oriented funds in the last couple of months. Since the market valuations have corrected along with significant drop in interest rates, long term equity market prospects do look attractive.

Our endeavour going ahead would be to reduce cash balance in favour of equity depending on the market situation.

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