Equities remain a good bet

Global money will chase growth. We might clock 6 per cent or 6.5 per cent growth this year,but ultimately it is developing countries like India and China that will be the engines of growth for the world economy. I see money flowing back to India some time during the first or second half of 2010. So equities remain a fairly good bet. We are in a low inflation and low interest rate regime. These conditions typically set the ground for a bull market.

amp;149;Equity markets at home have been following global cues. Has the situation in the West improved adequately for Indian markets to witness a turnaround?

Things are worse in US and Europe and the markets there will take a lot of time to turn around. They have enjoyed a bull market for over 20 years. The longer the bull market,greater is the time to make a recovery.

America is no doubt the biggest investor. But as we enter the election mode,things might change. If a strong coalition emerges,we could expect major reforms to happen in pension,insurance,etc. If this happens then our dependence on FII foreign institutional investor money would get reduced to some extent as more domestic money will be allowed to invest in the equity markets.

The government has learnt the hard way how FII money can dry up really fast. If we have money from domestic institutional investors DIIs to support the market,volatility can be addressed to a great extent. In that sense,it will be beneficial if more domestic institutions are allowed to invest money in the markets. And DIIs do have deep pockets.

amp;149;What are the other asset classes that people should invest in at this stage?

After equities I would recommend gold. The yellow metal has consistently given good returns and acted as a hedge against inflation.

amp;149;Could falling interest rates spur a turnaround in the economy in 2009?

There is continuous pressure from government on banks to soften interest rates. But high level of borrowing from the government post elections for inducing growth could lead to some hardening of interest rates in the second half of this year.

But the lower interest-rate regime is here to stay for a few quarters. This will show some kind of impact on financials from quarter four Q4 results onwards. We could see better volume offtake in sectors like real estate and automobiles as compared to previous quarters. Revival of capacity expansion and infrastructure projects could see the capital goods sector benefit as well. But as working capital requirement in all the major sectors has fallen on account of the slowdown,lower interest rates may have limited impact on profit margins in the quarters ahead.

amp;149;Which sectors do you think will do well this year and why?

I think sugar looks good as this seems to be the only commodity that will see a surge in prices due to supply shortage. The power sector is in the midst of heavy commissioning of capacity,so power equipment and intermediates will see stable topline growth. Telecom looks robust,but it could top out if telecom companies don8217;t expand into the rural segment. FMCG and Pharma look safe for parking your investments in the uncertain 2009 ahead of us.

amp;149;How will the banking sector fare this year?

We have seen financials leading the rally across all global markets in the recent pullback. But the Indian banking sector in still in uncertain zone and has seen heavy dumping by institutions as there is lack of clarity on non-performing assets NPAs. Overall the banking sector is expected to see limited expansion in their net interest margins NIMs as the government is putting pressure on banks to reduce key lending rates while there is limited scope to reduce interest rate on deposits. Some banks like Axis Bank and Bank of India have managed to expand their book size considerably as compared to the sector. But overall banks may not outperform the broader market.

amp;149;From 2002-07,we witnessed an inverse relationship between the dollar and commodities. However,the dollar has now started weakening after a strong upward rally. Can we now expect commodities to revive?

A falling dollar leads to strengthening of commodity prices,but the inverse relationship may not always hold good in this environment where global economies are dealing with the worst slowdown in the last seven decades. We have a genuine case of low

demand in dollar-backed commodities. Hence any upward rally could also be speculative in nature.

We have seen gold rallying on investment demand in spite of heavy correction in crude and metals. However,falling interest rates across all economies is also one reason that money will chase investment in commodities,and this could lead to a revival.

amp;149;What is your outlook on gold for this year?

Gold prices could move only sideways in the near term. Ahead of a long cycle of revival,gold has become a safe investment for investors. Any further pressure on the dollar and commodities could lead to gold moving up. There is also the supply argument in favour of a strong rally in gold.