What should investors expect over the year in a market that has remained volatile since the beginning of the year? We posed this question to Mr Lalit Nambiar, Fund Manager, UTI AMC.

Mr Nambiar says that investors would have to wait for the continuing time-correction to play through. . Excerpts from the interview:

Most people think that Sensex at 15 times forward earnings is attractive. But how stable are those estimates?

Commodity prices in general and oil price in particular can make a huge difference. They can swing valuations from a 15 or 16 PE (price-earnings ratio) to 18 PE. So it is very difficult to give an answer for a one-year period. Over a two-year period it is a little easy, as most of these factors will start reverting to the mean. You do not think that oil is going to straight away jump to $116 (Brent) because you are still not sure of the firming-up of economy in developed markets. There is a bit of swing-back of money from emerging markets, as people are booking profits. In the long term, developed markets remain bad compared with emerging markets.

There is a time correction in this country, as multiples, especially in mid- and small-cap segments, have shot up. So you will have to wait for it to play through as earnings start coming next year and a year after that, and PE starts looking attractive.

So you do not expect any significant earnings downgrade?

Remember that prices of commodities and oil may reverse. If you see China, they have ramped up big time on investments. We hear about ghost cities and towns. That overheating has led to tightening. The point people are trying to make is that there will be a sudden slowdown; slowdown is never gradual in China. It is not good for equity markets, but it is good for a consumer-oriented market like India. So our inflation and earnings estimate will change then. This is an upside risk that you have to bear in mind for a conservative portfolio. But chances are what you will really have is something in the middle.

So over a year returns may not be great, and the Sensex may yield say 6 per cent. But if you look at the bottom in the market, and if you manage to get in then you may still manage a 15 per cent return. It is all about when and what you buy.

In the last year mid-cap stocks have disappointed. In the recent correction too, they fell sharply widening the valuation gap. What is wrong with this market-cap segment?

Instead of a mid- and large-cap distinction, we would like to cut it up by sectors. In some of the emerging sectors, infrastructure being one of them, the story is more on paper rather than on the ground. So you will have high leverage situations where the company is expected to give you rapid growth.

Power, infrastructure, media all have high spends planned and people are looking at growth. What is growth? It is value in the future. If you come to the conclusion that that value appears to be eroding or disappearing at the horizon then you start getting worried. So you say there will be growth after five years. Then when the interest rate dips you say there is growth after 10 years.

This belief changes the minute interest rates start going up. So automatically your banks start hurting you. Secondly it may become less attractive to take such risks. Retail investors start looking at fixed deposits. So there is what is called a time-correction in these stocks. You have to let them pass this phase, and start showing numbers. Either the bottom line has to get better or the multiple has to come down and look cheaper. Otherwise without cash flow, it is a mere risk-appetite play.

Thematic funds that top in one rally have fallen back significantly in the next. With pharma at the top of the current rally, will they be left out after any correction?

We do not advise investors putting their money in one fund. It is always going to be a core-and-satellite approach. You need to invest in a theme keeping in mind that at some time, depending on the nature of the sector, it will either be countercyclical or pro-cyclical to the market. If you want to enhance your returns you would probably try to go pro-cyclical. Infrastructure, for instance, would be pro-cyclical. Pharma on the other hand is countercyclical. Also the volatility in the pharma sector is far less than other sectors, as they are cash-flow generating companies at the underlying level.

Another disturbing factor is the sharp correction in the market despite only a small proportion of FII outflow, compared with inflows. Do our markets still lack depth?

The problem is that you do not have a vibrant investment industry for a pool. Also a large amount of money that came in was for the offers in the primary market, such as Coal India. So knocking that off, the market has not gone anywhere with all this money. That is money of the people who had zero value in the table. Theoretically, it is someone who has a Rs 20-face value stock. FIIs like that stock, and it gets listed at Rs 80. You have to look at the other new stocks too. Those new stocks have not come to the indices. So how do you benchmark those returns? It is not an apple-to-apple comparison. But you are right — there is sensitivity to FII flows, something our regulator will hopefully look at. You need to have a vibrant institutional industry.

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