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WF: Confidence in equity markets has been very badly shaken more because of domestic factors than just the external factors. We have certain bearish forecasts of 11000-12000 on the sensex. What is your perspective on equity markets and what are the likely key drivers this year?
Bala: From the economic growth perspective, GDP numbers which have been a major driver so far may stand reduced to 6.5 percent this year. We see that the consumption led growth story of the last many years is tapering off and investments have come down significantly. All these things are being reflected in the price of the stocks.
Earnings are going to remain volatile for the next two quarters. Pressures on margins as well as on the topline and profitability of the companies are going to make first half rather tough for them. At the same time, we can expect a turnaround in the second half of the year largely driven by the interest rates movement. We could witness low growth momentum on the economy and low inflation by the end of this year which would lead to a decline in interest rates. Policy rates would also be more supportive of growth this year. However, lack of confidence would defy growth in the first half and our view is that probably the growth will come back in the second half of this year and equity markets will start looking better then.
Based on our analysis, we see that equity markets today are comparable with what they were in the year 2002-2003. High interest rates, high inflation, high fiscal deficit, high current account deficit and depreciating rupee are the major variables which mark the similarity of the two equity market scenarios. If we draw a parallel from now to 2001-2003 and subsequent years, the market has given a good return.
On the valuation front, the P/E multiple is close to about 12.5 in the index. It is 1.5 numbers higher than the last low closing of 10.5 which happened in 2008. We witnessed previous low P/E in 2002. The markets have given a good return subsequently for a period of three years. The outlook from the investor's point of view is bit shaky in the short term. Valuations are in your favor but sentiment is not; it is a good time to a bull in the equity asset class for medium term benefits.
WF: Should we expect this 15000 sensex to dip from these current levels and then come back to the same 15000 levels by the end of the year or are your expecting markets to be substantially higher by the end of the year?
Bala: We are expecting in the first half that the market will move in a narrow range. And second half could be coming back to the earlier peak. We are hoping that election results would lead to a better management of government activities which alongwith falling interest rates will boost the confidence. I am seeing a limited downside from here on in the equity market; say about 5% downside.
WF : What is your view on fixed income markets form 2012?
Bala : As far as the fixed income is concerned, I think it is going to be the year of fixed income. With the present scenario of high fiscal deficit and poor credit off take in the banking sector, the interest rate picture has to turn positive. We expect that a 100 basis points cut in the interest rates and maybe about 50 basis points cut in the CRR could become a reality. The best way to play on the bond side then is through the mutual funds which actively manage their portfolios. We feel that the shorter end of the curve which is about 3 to 4 years kind of a segment will find a risk award in favor of the investors. Also because of lack of issuance, people would prefer quality over yield. We believe that the credit environment may not be that great mainly because of slowdown driven increase in NPAs in the banking sector. So from mutual funds point of view, a duration play would be preferred over credit calls.
WF: From a distributors point of view, their business confidence seems to be at a low in recent months - on account of a combination of falling equity markets, plunging volumes, squeeze on margins, regulatory action and so on. What do you see as the road ahead for mutual fund distribution over the next three to five years?
Bala: I am actually becoming a little bullish on this one. The fact is that the general slowdown is now impacting all businesses - but it does not mean that the wealth effect of the country is reducing actually. Though the last 4 to 5 months has been a slippage; but otherwise wealth effect keeps throwing up opportunities for financial advisors and there is no doubt on that.
As we move forward, I will not be surprised if the regulatory environment would also be supportive of the financial market, including the capital markets with a view to attract more retail participation. In my view, that would come largely through mutual funds for which financial advisors will get a great opportunity to service them.
WF: So in what ways do you think regulators may look at boosting the business?
Bala: There have been some discussions on how do we actually penetrate the retail market into the deeper parts of the country. The regulator has taken up with earnest the task of looking for solutions to expand the retail penetration of capital markets. From the financial advisors point of view, this is a good time to spread their wings, in terms of expanding their client base which I think will become very crucial in the years ahead. So increasingly a time will come that every distributor will have to start focusing on increasing their client base which will ultimately make them survive and grow in the long run.
Also because of general slowdown in the industry, the job market could be little tough. This could drive in an entrepreneurial kind of model once again. In my view that would come largely into the financial services products. But this is more of my personal gut feeling.
The related question about the agent vs advisor model - my view is that at this point of time, it is a draft paper which is being discussed at various forums. I can only assume that the regulator will consider the feedback received and only post that regulations will come - maybe some time away.
WF: There is talk of upfront commissions being banned. Then there is this threat that under the proposed advisor regulations, all forms of commission including trail will be banned - for those who choose to become advisors. The revenue model for distribution is in flux and clarity is the need of the hour. What kind of a revenue model do you see as sustainable in distribution?
Bala: My view is that one should not get worried on trail commissions going away for two reasons. One : any regulation that comes will likely be prospective and therefore trail already coming in on current AuM should remain intact. Second : if trail were to be prospectively banned under the proposed advisor regulations, it has to come along with other changes like changes in expense rations, share classes etc. This cannot come in isolation as it will otherwise have a radical impact on business models. So, it's a combination of multiple things that may come, whenever the advisor regulations get frozen.
WF: Which product segments would you suggest distributors to focus on to drive up business volumes in 2012?
Bala: I think in the first half, they should clearly go for front loaded mobilization of debt oriented schemes. Money mobilized in Jan and Feb should get a good opportunity during this year to earn good returns for investors. Duration based products like our Dynamic Bond Fund should be in focus in this segment. I believe our Dynamic Bond Fund will be our flagship product this year.
We are also going to focus on capital protection oriented funds in the coming 3 months - peaking interest rates and weak equity markets offer a good combination to launch such products.
In the equity space, the focus should be maintained on SIPs and STPs. Large caps should be preferred - products like our Frontline Equity, for example. This is a very good time to build an equity portfolio on a systematic basis.
And finally, I think a lot of focus should be given to balanced funds like our BSL 95 - which achieve an auto-rebalancing between equity and debt in a tax and cost efficient manner.
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