14th March 2012

WF : Global markets have rallied significantly in Jan12 and are further cheered by the US Fed pledge not to raise interest rates till 2014. Is this a purely liquidity driven rally or are the fundamentals globally shaping better? How sustainable is this rally?

Chirag : The rally is a combination of surfeit liquidity and supportive fundamentals. Markets have been stagnant over the last few years and as a result valuations have become attractive with many markets trading at below their long term average valuations. In the near term changes in liquidity drives market movement, on a medium term, fundamentals become more important, which in India are encouraging.

WF : Is our market rally purely a high beta play on global liquidity or can we take some comfort that our market's low valuations have found appeal among FIIs?

Chirag : As Benjamin Graham aptly put it 'in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine'. Thus, liquidity, which is in part a barometer of sentiment, tends to play a more important role in the near term. Over the longer term, it is fundamentals which will determine the market's movement and they remain positive. After all, strong economic performance attracts sustainable flows. If performance is weak, money will eventually move out in spite of positive overall liquidity.

WF : In your outlook presentation for 2012, you have talked about a case for PE expansion in India. Looking back at history, what are the factors that have led to PE expansion in our market and how do we currently fare on these factors?

Chirag : Today, valuations are below their long term averages and thus over an extended time frame there is an opportunity not just from growth but also from some improvement in valuations over time. An improvement in PEs can be driven by a variety of factors - correction in commodity prices, fall in interest rates, change in political momentum, improvement in corporate earnings and in general a mismatch in expectations versus on the ground reality regarding these and other factors.

WF : We know that fiscal slippages can negatively impact bond markets. To what extent would this impact equity markets? Which sectors should one be cautious about, if growing deficits become a central concern for the economy? Which are the sectors that can remain relatively immune to this concern?

Chirag : A widening deficit will have a broad impact. It will crowd out private borrowing and raise borrowing cost. In a scenario of high interest rates generally companies with large capex plans and who are highly leveraged are negatively impacted.

WF : Are you seeing any improvement in on-ground activity to justify optimism on the infrastructure sector? Would you be a buyer in this sector today?

Chirag : It is worth remembering, that markets are forward looking and often bottom out even before the trough in earnings/fundamentals. We are selectively positive on certain infrastructure related stocks. There is some amount of stability being seen in selective areas.

WF : Which are the sectors that you believe will lead the next bull market?

Chirag : We largely follow a bottom up approach in creating our portfolio rather than a top down, thematic one i.e. go by stock selection rather than sector selection. In certain areas, where valuations are particularly hard hit such as banks and infrastructure there is a more fertile environment to make stock specific investments. Having said that, we remain stock specific and are finding reasonable investments across sectors.

WF : How are you currently positioning your portfolios - are you more defensively positioned or are you - at the margin - getting into growth / cyclical plays? Which sectors are you investing in now?

Chirag : As mentioned earlier, we largely follow a bottom up approach in creating our portfolio rather than a top down, thematic one.

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DISCLAIMER: The views expressed Mr. Chirag Setalvad, Senior Fund Manager- Equities of HDFC Asset Management Company Limited (HDFC AMC), constitutes the author's views as on February 22, 2012 and is based upon information that is considered reliable, but does not represent that it is accurate or complete, and it should not be relied upon as such. The response to the questionnaire is for information purpose only and is not an offer to sell or a solicitation to buy any units of Schemes of HDFC Mutual Fund. The information / data herein alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on the authors views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The recipient alone shall be fully responsible / liable for any decision taken on the basis of this interview. The recipient(s) should before investing in the Scheme(s) make his/their own investigation and seek appropriate professional advice.