With the market showing little signs of a clear direction, Business Line had an interaction with Mr Krishna Kumar Karwa, Managing Director, Emkay Global Financial Services to know the way forward for markets, developments affecting the market and what sectors retail investors can bet on.

Are current levels attractive enough to draw investors?

Tracking indices is useful to gauge the trend of the markets and is helpful to that limited extent for aiding investment decisions. However investors should never allow market sentiments or sharply rising or falling indices to overwhelm their basic investment decisions. The current environment is challenging locally and globally and corporate performance could be adversely impacted for the next few quarters and FII inflows could remain subdued for some time. On a broad basis valuations are fair and not at a great discount. At current levels investors with willingness to digest notional mark to market losses and with ability to average on the downside may selectively invest. We are advising investors to put money in companies with strong and proven management and having strong balance sheets.

Where do you expect the Sensex to be one year down the line? What are the risks of not going up to these levels? Which sectors are expected to outperform going forward?

Global commodity prices have begun to cool off and hopefully in the near future sustainable solutions to the euro zone crisis should also be arrived at. Domestically we are grappling with inflation, rising interest rates, slowdown in Government decision making and consequent weakness in the investment cycle. Consumption story has been strong so far but we could see a slide there also in the coming few quarters. We believe that first half of the year will be challenging for the corporates. During the second half of the year, we shall see inflation peaking and interest rates also showing a similar trend. We are optimistic that the outlook should improve in the second half of the year and stock prices also should reflect that. On a full year basis we expect the indices to deliver a 10 per cent positive return in the next one year. If inflation continues to remain stubborn and the euro zone sovereign crisis is not resolved then all hypothesis may have to be reworked. Defensive sectors such as FMCG and pharma will continue to outperform in a rising interest rate environment despite their rich valuations. Telecom stocks should continue to do well. Infrastructure, capital goods and banks have corrected sharply in the last few quarters for obvious reasons. If investors can see positive policy announcements from the Government and see interest rates peaking then these sectors could offer good returns.

Will equity market compensate investors for the given level of risk over the next two years?

In the current high interest rate environment, it is natural for investors to expect superior risk-adjusted returns from equity markets. It is tempting for investors to alter their asset allocation and increase weight to debt from equity. Investors should avoid committing this fallacy and remember that on a long term tax-adjusted compounded basis, equities always outperform debt.

Equity investors would do well to view equity investing from a 5-10 year horizon than expecting returns on a yearly basis. Yearly return expectations can only be met by fixed income instruments.

Is the current market volatility driving away retail investors from equity markets?

There has been a structural change in the equity markets with futures and options being the preferred segment of the equity market than the cash segment. The futures and options segment accounts for almost 75 per cent of the volumes. This segment primarily caters to the traders (institutional or non institutional). The volatility of last 3-4 years, absence of steady returns from equity markets and the emergence of other asset plays such as commodity markets and the current high interest rate environment has been detrimental in attracting new retail investors to the equity markets. This in fact resulted in existing retail investors paring their exposure to the equity markets. The current volatility has only added fuel to fire and retail investors are not willing to increase exposure till global stability and local headwinds are cleared. Retail participation, be it direct or through mutual funds, or ULIPs is currently weak.

What is your take on change in Double taxation Avoidance Agreement with Mauritius and its impact on Indian markets?

Amendments, if any, will be prospective than retrospective and there will be sufficient time for FIIs to move to other DTAA destinations. The knee-jerk panic reaction two weeks ago was more a manifestation of the prevailing weak sentiment than any panic selling by FIIs. The country needs FII portfolio inflows and I am sure despite periodic reviews, the authorities would not want to rock the boat. Over a period of time the sub account disclosure norms and so on have been tightened to prevent abuse and money laundering and that will continue to happen.

There are concerns of share pledges by promoters leading to de-rating of stocks in the market. What is your view?

There is nothing wrong in promoters pledging their shares to meet their personal or corporate funding requirements. As long as corporate performance is stable and the personal leveraging of the promoter is manageable there is no risk to the stock. The risk arises only when there are other issues impacting the stock price such as cumulative selling by actual investors and the financiers. It becomes self-fulfilling with no support.

Investors should always verify the extent of promoter holding and leverage, if any, before investment. Low promoter holding or highly leveraged promoter holding should be red flags for investors to investigate before taking investment decisions.

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