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Journalism of Courage
With credit risk assessment and risk evaluation of financial products as his forte,K Ramanathan heads the investment functions for the single manager division of ING Investment Management India. Ramanathan,who joined ING India in 2006 as the head of fixed income,is credited to have ensured consistent top two quartile performances of ING Short term Fund,ING Income Fund and ING Gilt fund. In an interview with FEs Saikat Neogi,he says retail investors should factor in valuations and sustainable growth prospects,along with domestic and global macro factors,before picking up stocks. Excerpts:
At high valuations,what should a retail investor factor in before he picks up stocks and how should he look at IPOs?
Valuations at 16 times FY12 earnings (for Sensex) are neither cheap nor overstretched. Retail investors should factor in valuations and sustainable growth prospects (both stock specific) and domestic and global macro factors before picking up stocks. Since a retail investor does not have the wherewithal and time to do this,he should choose an appropriate investment vehicle rather than direct equities. Mutual funds offer an attractive investment vehicle for retail investors who can benefit from professional expertise,transparency and operational convenience. SIPs (systematic investment plans) offer an efficient route that enables rupee cost averaging,which benefits the retail investor.
Why are we seeing so much redemption from mutual funds? Is this only because distributors are not selling mutual funds?
A combination of muted inflows due to the entry load ban,and profit booking by investors at current levels,have resulted in redemptions. Investors still seem to have a premonition of the 2008 crash as the current index level is close to the peaks reached before the crash. Investors are also looking to time the market by booking profits now and reenter after a fall.
While FIIs are investing in Indian equity,DIIs are pulling out. Why are we seeing a reverse inflow of funds into the equity markets?
Return opportunities in developed economies is poor due to weak growth prospects and close to zero interest rates. At the same time,to spur growth,central banks in developed economies have resorted to easy liquidity policies with talks of further quantitative easing in the US,following similar steps recently in Japan. The deluge of global liquidity and robust earnings growth prospects is resulting in increasing global allocations to emerging markets like India. Selling by DIIs can be attributed to selling by mutual funds and select insurance firms. Inflows into mutual funds have been hit after last years ban on entry load. Also,given the current absolute levels of the indices, investors are booking profits in their mutual fund investments,thus leading to selling by domestic mutual funds.
How do you see the long-term fundamentals in Indian equity markets?
We expect FY11 GDP growth to be around 8.5-8.8%. We estimate FY11 earnings growth (Sensex) to be around 23% and FY12 earnings growth to be around 20%. Returns from the equity markets would be in line with the growth in earnings. We are positive about consumption demand. This,along with large outlays planned in infrastructure,should lead to an upturn in the capex cycle over the next several years.
What kind of shift in retail investor patterns do you think will take place?
Currently,retail investors seem to be booking profits. The intention seems to be to reenter the market once again after a fall.
How do you expect infrastructure bonds,which give IT rebate under section 80CCF,to fare in the market?
These bonds are attractive due to the rebate on investment up to Rs 20,000,which gives more than Rs 6,000 in terms of tax saved for the investor in the highest bracket. Despite the lower-than-market interest rate,post-tax yields are attractive. We expect these bonds to generate good interests. The fact that the bonds will be issued both in demat and physical forms does increase the attraction for retail investors who do not have demat accounts.
