04th January 2012

WF : What is Blackrock's global market outlook for 2012? What are the major themes/geographies that seem to be investment worthy in 2012?

Naganath : Over the next few months, we expect to continue to see volatility in the global financial markets until further clarity can be reached. Although recent macroeconomic data from the US economy was reasonable, market participants remain concerned and cautious regarding the sovereign credit issues facing the Euro-zone. Although the ECB has stepped up its response to the Euro-zone crisis by providing loans and continues to intervene, this only provides short-lived relief to the on-going problems. Unless there is a concerted effort to find a solution to the current crisis in the Euro-zone, the global markets will remain volatile and continue to negatively impact market sentiment and growth. That said, we believe that economic growth will continue in a sustained - if sluggish - manner. The global economy has slowed in the recent months from the robust growth rate that we witnessed around the turn of the year, while inflation has remained stubbornly high in many countries, particularly the emerging markets.

During volatile market conditions, in our view it is more appropriate to adopt a more conservative investment stance until there is clarity that the material tail risks have begun to recede. In addition, in a sustained volatile market, such as today's persistent environment, it is important to diversify investments across asset classes and geographies. Since it is difficult to judge where the next rally or plunge will take place, diversifying investments across asset classes, geographies and currencies is a prudent way to spread the risk around, thereby seeking to optimize returns commensurate with one's risk appetite.

WF : Domestic equity confidence is badly shaken - and it seems to be more internal rather than external issues. What was regarded in the beginning of 2011 as one of the most promising long term equity stories in the world has turned in one of the worst performances in the world in 2011. What is your prognosis for Indian equity markets for 2012 and what are likely to be the key drivers?

Naganath : Given that the second quarter GDP number was sub 7%, we believe that India is currently experiencing a slowdown in growth. India is slowing due to the tightening of monetary policy to bring inflation under control. Further, the slowdown is driven by a dip in investments largely due to a more uncertain global backdrop. Therefore, looking ahead, growth is expected to remain muted as export growth also eases in response to slower external demand.

While growth risks are rising and the currency continues to remain weak, there has been some respite as primary inflation moderated and global commodity prices corrected somewhat. This should help moderate the core inflation going forward and have a positive effect on growth.

In addition, although the currency remains weak and the fiscal deficit is high, we do not envisage any major slowdown in India's growth story. We believe growth will continue to be driven by strong domestic consumption, which is mostly a result of a rising middle class, young working population besides strong rural demand. Furthermore, India's low dependence on exports as a percentage of GDP has somewhat insulated the economy from global macro shocks.

WF : Is 2012 likely to be the year of the income fund? What is your prognosis for fixed income markets in 2012 and what are likely to be the key drivers?

Naganath : Yes, we do believe that 2012 is likely to be a good year to invest in income funds based on our expectations for the fixed income markets. We expect headline inflation to stay benign at around 7.0%-7.5% y-o-y, inch up in the second-half of the year to around 8-8.5% y-o-y and remain range bound from thereon. We also believe the RBI may infuse liquidity in the banking system in a gradual manner to ease liquidity pressure in 2012 and start cutting rates in the first-half of 2012. In addition, although the fiscal deficit is expected to remain elevated in 2012-13 due to high government borrowing, and India's GDP growth is likely to slow down further in 2012-13, resulting in a slowdown in credit off-take during the first-half of the year, the above developments may result in a steeper yield curve as opposed to a flattish one that is currently present. This change in the yield curve will be accompanied by a gradual decline in the term-structure of interest rates with short-term rates (assets maturing within 2Y) falling more than long-term rates (assets maturing 5-10Y). As such, we believe that these changes will bode well for the fixed income funds which have higher exposure to the short-end of the curve.

WF : If you had a 12 month mandate, an absolute return objective and an investment universe across asset classes and geographies, which asset class would you bet on today? Would your answer be different if the time horizon were 3 years?

Naganath : As mentioned above, during volatile market conditions, a portfolio comprised of diversified large cap companies could be a more attractive investment for investors. Due to the fact that the companies is this universe have achieved scale, have good management resources, and generally are leaders in their industry categories, they are better able to sustain growth during volatile times. In addition, investors with a horizon of 12 months could consider investing in funds that focus on dynamic asset allocation.

With regards to longer duration investments, we believe that an investor should base his/her investment on his/her risk appetite considering an investment horizon of 3 years.

WF : The regulator seems very keen on distributors earning fees from their investors rather than from product manufacturers, while distributors continue to be very apprehensive of collecting fees from investors. Can distributors reasonably expect to build their business models around trail income, or do you foresee a situation where they have to bite the bullet and find ways of charging fees? If you were to look into a crystal ball, what revenue models do you see as sustainable in the future?

Naganath : This question is best answered by distributors themselves and would depend on their respective business models. Despite slow growth in 2011, we are optimistic that the market potential will expand significantly over the medium to long term.

WF : What product segments within the MF category would you ask distributors to focus on in 2012, in a bid to increase sales momentum?

Naganath : In the current economic scenario, we advise distributors to focus on portfolios comprised of large cap companies with low leverage. Generally these companies have achieved scale, have good management resources, and are leaders in their industry categories. As such, the performance of large cap companies may potentially provide for a 15% CAGR over the long term although these returns may not be linear.

Investors with a reasonable risk appetite and understanding of volatility should invest in a long-duration fund such as a government securities fund. Investors with a horizon of 12 months could consider investing in funds that focus on dynamic asset allocation. Investors with a limited risk appetite should invest in schemes such as Short Term Funds with a minimum holding period of six months.

WF : What are your plans at DSP Blackrock for 2012?

Naganath : At this point of time we believe that our product suite is appropriately positioned for mutual fund investors with various risk-return profiles. However, we continue to examine the potential for new products. Therefore new products are considered if we discern specific interest from our distributors or investors.