8216;The markets could be volatile as we move into the election season8217;

To give a background,the large cap index gave a return of around 26 per cent in calendar 2012. Most of the returns were due to re-rating of the market from a P/E of around 13-13.5 times FY8217;13 earnings to around 15.5 times by end of year. The market was also spurred by the reforms announcements post August 2012 as well as peaking out of interest rates. The third quarter results for FY8217;13 clearly signalled that still all is not well as reflected by several macro parameters on growth IIP,GDP as well as poorer than expected results season.

The market in the first quarter of this calendar year gave up some of the gains made last year and we saw a de-rating. Earnings growth expectation also got revised downwards. The market was also spooked by concerns of political stability after the pull out of DMK. Then there was the Cyprus issue in the euro zone. These events have made the market volatile. Markets after the fall are trading at around 14 times FY8217;14 earnings and are not expensive. These valuations already build in some poor expectations of recovery.

The market movement for FY8217;14 will be determined by the pace of economic recovery. The recent sharp fall in oil and other commodity prices have given more fillip for RBI to cut rates. It also portend well for current account deficit reduction,which has been a concern. These factors will surely support RBI to cut rates by at least 50-75 bps in the remained of calendar 2013. So RBI policy should continue to be pro-growth and backed by reducing inflation. The key now is fiscal policy and reforms. A stable government is key for this. However the markets could be volatile as we move into the election season.

Are investors also rattled by uncertainty over general elections?

The recent pull out of DMK from the Centre has surely increased uncertainties. Also there is a general perception that policy making could take a backseat as we move towards elections. There is also uncertainty regarding elections results and new government formation that could create volatility in the markets.

Are investors still concerned about policy uncertainty or issues like the CAD and the fiscal deficit?

The concerns on fiscal deficit have diminished due to good expenditure controls for FY8217;13. For FY8217;14,considering the recent drop in oil prices as well as the intention to bring diesel to market related pricing has boosted confidence that subsidies could be under control and fiscal target of 4.8 per cent of GDP can be met. In terms of policy and reforms a number of initiatives like state electricity board debt restructuring,coal availability etc are being addressed but these would take some time to implement and the benefit to be felt on the ground.

What is your outlook on gold prices? Do you think it is a safe bet for small investors to use as a hedge against inflation or is the price volatility too much of an issue?

Gold is a hedge against inflation,the dollar and increased global uncertainty. It should be part of an investors portfolio. Lower global inflation,lower global uncertainty and recovery in the US has led to underperformance of gold in the recent past. The downward movement has also exacerbated recently due to technical factors like worry of European governments offloading gold to raise capital.

What is your expectation from the mutual fund industry in 2013-14? Will the Budget have any impact on sales/growth?

There has been good money flow into debt oriented mutual funds,which should continue in FY8217;14 given the positive outlook on interest rates. At least as of the last two months we have seen reduced redemptions from equity funds. The Rajiv Gandhi Equity Savings Scheme has been one major benefit for the fund industry and fund houses have launched these schemes recently. This is a positive. However the negative has been the removal of lower dividend distribution tax for retail investors in the debt oriental mutual funds.

Equity or debt which of these is a better option for a small investor?

This is not a either / or choice. One should hold both,and look at other asset classes like commodities,gold etc. from a diversification perspective. The proportion / asset allocation depends on several factors like risk appetite,age,wealth,time horizon and income levels of the investor. The investor needs to contact a financial advisor to plan his asset allocation.