Positive expectations getting priced in

Valuations are not getting stretched by any measure. If we look at historical levels,the higher end of sustainable PE was around 17-18 and the lower end was around 12-14. We are at the lower end at present. Therefore,the question of stretched valuations does not arise at this point of time. The recent run up has made the market a bit more expensive as compared to the very cheap valuations that we had seen earlier when the indices were hovering around the lowest levels in the last couple of years.

Are you now expecting a correction?

Corrections are part of any healthy and vibrant market. Therefore,they happen both in an uptrend as well as in a downtrend. As you are aware,the market has run up quite fast in the last couple of weeks mainly after the elections results. The up-move was unprecedented. Technically,once the market moves into an overbought position,it has to correct downwards. In an oversold position the reverse happens. So we need not be wary of that. It is also a mechanism by which the market tests the strength of the trend. We could see some profit booking and hence a corrective downward move. In fact,in the last two trading sessions we have seen some selling coming in.

What would your advice be to investors who have missed the rally over the last couple of months?

Investors could move in with corrections. For mutual fund investors systematic investment plans SIPs would be the ideal route.

How are corporate earnings likely to fare over the next couple of quarters?

Corporate earnings are likely to remain subdued in the coming two quarters as earnings are a function of economic growth. With growth decelerating from the 8.5-9 per cent mark to 6.5-7 per cent level,corporate earnings are also bound to be sluggish. But we can visualise some revival by the third or last quarter of this financial year. You should keep in mind the fact that the market always tries to price in expectations. This pricing-in helps the markets to do well.

How is the economic outlook in the US? Has the situation stopped deteriorating?

Conditions in the US seem to be stabilising. A pre-condition for US economic revival is revival of the banking and financial system. Unemployment rate is still rising. If we are to go by internal reports from the US,the recovery there could take more time than is expected. The minutes of the April 28-29 Fed meeting released yesterday reveal the concerns of the Fed over persisting economic problems and the deepening recession. It is likely that we may see some signs of improvement only by mid-2010.

What do you see as the main positives and negatives of the Indian economy at present?

The Indian economys strongest positive is the fact that economic growth is domestic demand-led and not too dependent on external factors. India now offers a stable political and economic environment that is conducive to growth and development. Finally,the scope for development is higher in India compared to many other countries,which makes it an attractive business destination for outsiders. These are the strong positives.

I do not see any major negatives. Probably,we need to gather more speed in execution,especially in areas like infrastructure. And we could also move towards lower rates of taxation and interest rates from the current levels.

The stock market rally on last Monday was fuelled by the United Progressive Alliance UPA receiving a stable mandate. What can the new government do to put the Indian economy back on the growth path? And what can it do by way of reforms?

We expect a stable government and a more focussed and faster approach to issues and problems. We can also expect the reform process to get accelerated. This could be in infrastructure,banking,financial services,and retail. The buying that happened is the result of all these expectations being priced in and also the funds that have come in from foreign institutional investors FIIs.

What is the attitude of FIIs likely to be vis-à-vis the Indian stock market?

FIIs look at return differentials while investing in various markets. They also look at various factors like currency- and country-risk while committing funds. They have reason for comfort on all these fronts as far as India is concerned.

In your view,which sectors now offer good prospects to investors who have at least a three-year investment horizon?

The sectors that could do well are banking and financial services,where we will see mergers and consolidations; power sector,where the scope for reforms is maximum; infrastructure,which is on top of everybodys agenda; organised retail and telecom. These sectors are more linked to domestic growth efforts,and therefore,should do well under normal conditions.