‘This is the place' for 3-5-year investing

Mr Raj Bhatt, Vice-Chairman and CEO of Elara Capital, has worked for 21 years in financial services in seven locations spread over three continents. A Chartered Accountant and Company Secretary by qualification, he is also a corporate finance representative registered with the Financial Services Authority — UK's capital market regulator.

In an interview with Business Line , he talks about issues relating to economic fundamentals and their impact on the stock markets.

What is your view on the Budget?

The only thing about the Budget that people are concerned about is the fiscal deficit number – 4.6 per cent – which is quite optimistic.

But the deficit will be very difficult to meet considering the rising crude oil prices, unless the Government goes into divestments.

Where do you think the oil prices are headed?

Oil prices are affected more by geopolitical events, like the situation in Libya. If the situation in Libya gets resolved, oil prices will come back to $85-$90 a barrel.

However, if it gets worse — if it spreads to other countries like Morocco, Oman and also there is some embargo on the movement of the ships in the Suez Canal — then the prices can breach its all-time high and go to $150 also.

What is the mood like outside with respect to the Indian market?

People are indifferent because they think valuations are fair. They are not pulling money out; just doing some trading. But there are no major thrusts of investments or withdrawal.

How about the FII inflows this year?

FII inflows will be sluggish this year, unless there is an earnings surprise. And I think people will start investing in mid-cap and small-cap stocks because there has been a major correction. Large-caps will move if earnings move and also the visibility on the macro-economy, i.e. inflation, interest rates and oil prices.

Will India's dependence on FIIs turn against it at any point, considering our domestic participation is low?

India also has individuals supporting the market. Retail participation will increase; it is a question of awareness. Progressively, the domestic retail size of the mutual fund industry has been growing. Penetration level will increase.

Last year, we saw record inflows of $29 billion. Do you see those levels coming back in later years?

It is possible; there could be inflows of $50 billion also because it's bound to happen. China has been getting $50-60 billion for so many years, while India gets only $29 billion so far.

Out of the $29 billion that came in, around $20 billion has come in through the capital market, which is not much.

There are companies that trade $20 billion a day. So, it's a question of government opening up more avenues, i.e. core sectors where there are FDI limits to absorb this kind of liquidity.

So did you see the budget opening up the mutual fund industry to foreign retail investors?

Yes, it's a good story but implementation will take a long time because it is very complicated.

Developed markets have stringent rules for soliciting money from the retail investors.

To get a UK or a US mutual fund investor to invest in India, the fund house needs to comply with their regulations. They need to be registered with their regulators and that compliance will take a lot of time - maybe six months or one year.

What sectors are you bullish on?

We are bullish on all sectors except real estate. Infrastructure, domestic consumption, power equipment sectors look very good. Power supply on the distribution side, manufacturers side the valuations were frothy, they have corrected now.

Do you think the mutual fund industry has been regulated too much?

In India there are problems of fees, transparency and awareness levels. Our regulation is absolutely fine because you need to protect the retail investor.

Where do you think the Indian markets are headed right now?

We are looking at an 18,000 levels right now and could be range-bound between 17,000 and 22,000 levels.

It will remain so, unless the earnings change to change valuations. If you are looking to invest for three to five years, this is the place. India's domestic consumption story is intact.

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