N MAHALAKSHMI: Each one here has an exceptionally good record in managing funds. Let me have the privilege of introducing them.

We have Sanjiv Duggal, chief investment officer of HSBC Mutual Fund. He has had an outstanding stint in fund management. For over 10 years he managed the India Off-shore Fund for HSBC. And for the past three years he has been managing the domestic equity fund with great success. Soon, he is going to relocate to Singapore and assume regional responsibilities. So, we will try and make the best of his presence here today.

Then we have S Nagnath, chief investment officer and president, DSP Merrill Lynch Mutual Fund. Naganath has a very rich experience in fund management. He brings to the table a global perspective - he managed funds at CSFB in the US before his current assignment. Naganath has been a Big Bull all through, more so when markets looked to go nowhere. Today, with the Sensex close to kissing 8000 levels, it will be interesting to hear how optimistic he is.

Then we have Prashant Jain, chief investment officer of HDFC Mutual. Whether it is shirts or stocks, Prashant does not like fancy stuff. He would rather wear whites or blues than flashy colours. Similarly in stocks, too, he goes for companies with strong credentials even if they are not the most sought after. One thing that I would like to highlight about Prashant is that he was one of the very few fund managers to predict the tech meltdown. In the middle of 1999, he had become quite bearish on technology and by the end of the year he had wiped out all tech stocks from his portfolio. Let's see if he talks about today's market with similar pessimism.

We also have A K Sridhar, executive director, UTI Mutual Fund, who is a very old hand in the industry. He has seen the ups and downs at the country's oldest mutual fund and also the perils of not sticking to investment mandates. Welcome Sridhar.

Next we have Madhusudan Kela, head of equities at Reliance Mutual Fund. He has an outstanding record so much so that now he is forced to say no to investors wanting to enter one of his funds (the sales window in Reliance Growth Fund has been closed as Kela fears that too big a corpus can drag down the fund's performance). Reliance Growth Fund has delivered a return of 60-odd per cent per annum over the last three years on a rapidly growing corpus.

And finally, we have Nilesh Shah, chief investment officer of Prudential ICICI Mutual Fund. Shah, who was earlier with Templeton as head of the debt desk, has proved to be a better debt fund manager. But we like him more for his radical views on various subjects, whether it is market or cricket. Welcome Nilesh. MAHALAKSHMI: In the first round, I would request the panelists to give their introductory remarks on their market outlook for the next one year and what investors should expect from them.

SANJIV DUGGAL: Right now it is a case of flood of liquidity. It seems new investors across different geographic regions seem to have discovered India. So you have this flood of money coming in. The positive sentiment, good fundamentals and flood of money have just taken the market up. May be, it (market) has run ahead of fundamentals and you see people increasingly buying today, assuming that FY06 is in the bag and looking out further to FY07.

Obviously, the longer the outlook, the more the risk involved. The key thing to watch out is that people are building in growth expectations. So if the expectations are not met, then the market could be at risk. But that will come, I suppose, over a period of time.

On what mutual funds or the market will deliver, our standard answer is 15-20 per cent returns per annum. Although when you look back at various funds, you never see a fund giving you that in any particular year. Either it is a big positive number or sometimes negative.

S NAGANATH: Broadly, I think, domestic fundamentals remain strong though one can say at these levels the market is tending towards fair value. I think corporate earnings will grow by 15-16 per cent and the market is close to 15 times. The issue, as Sanjiv pointed out, is one of global flows.

I was looking at the charts of about a dozen markets last evening, looking at the movements since early May. Our markets are up about 28 per cent but it is interesting to see that many have done well actually. Russia, for example, is up 25 per cent over that period, Nasdaq is up about 23 per cent, Dow and the Nikkei, too, are up 12 per cent. The list is endless.

So the point here is, we have done well, our fundamentals are good, but other markets have also done well. We attribute this to surplus global liquidity and, therefore, if that is the case, I am sure, we welcome a lot of global money coming from all parts of the world but then be cognisant also of potential risks, globally. That could in some way dent market sentiment at some point in future.

I don't know what the issues will be, but I would like to sound a word of caution in terms of global flows, because these are all vulnerable to any event risks.

Otherwise, domestically, I am quite comfortable with the fundamentals. In terms of returns, it is difficult to predict what you will get in the next six months or one year. If you look at the long-term record of the stock market, it has tended to give returns that pretty much mirror the underlying growth in earnings, depending on the P/E ratio at that point. Could you get 15 per cent CAGR from the market over five years? I think there is a reasonable probability that you will get that.

NILESH SHAH: Today, you are getting money from Japanese investors who kept on investing in China. The relation between the Japanese and the Chinese is as good as that between India and Pakistan. Suddenly, they have realised that they need a good alternative to China. You can get that alternative in Russia but again the relationship between Japan and Russia is as good as between Japan and China. You can get that in Brazil but that is far off and culturally different. You can probably get that in some other places such as Turkey or Mexico but they are too small. Suddenly they realise that here is this Buddhist country, India, and that is the place to be in.

So Japanese investors need a creditable alternative to China and that is where India fits in. And here is a set of people who have lots of money. Their own experience in equity market is negative returns for 25-30 years in the real estate market. Interest income in their own market is probably half a per cent or 1 per cent. So we have people with lots of money with very low return expectations. And they are trying to build a strategic investment in India.

So we will continue to see fair amount of flows coming in from Far East investors. After the Japanese, the Koreans will come, the Taiwanese will come and then the Chinese. Money will keep coming into India; there is no doubt about that. If money is coming, there is no point in talking about valuations.

In Nariman Point, there is no point in opening your umbrella to protect yourself from rains. You might as well get wet. So forget about valuations, forget about caution - just enjoy the ride. Bubbles have been built all around in the history and no one can argue that we are in a bubble era. Though, we are at fair value plus something. Then you can go to euphoric valuations, then to bubble valuations and then the bubble will burst. So we have many more stages to go through before the bubble gets created and then busted.

Mahalakshmi: So you do intend to ride the bubble...
Nilesh: The idea is to first create the bubble by telling investors that it is time to invest! On a serious note, money is flowing into India. Today, global investors are more confident than local investors. Local investors will also realise that they have actually missed the action. Today, most local investors have a 35 mm screen vision. They visualise equity market between 1992 and 2002 when selling in a bullish rally and buying in a bearish rally always made money. They have forgotten their own 70 mm vision right from 1982 to 2005. The markets have delivered 75 times returns in 25 years. And this was the time when India was having political problems. The country never had money, the growth rate was pathetic. Today, we have money, the growth rate is good, everyone wants to invest in India. So why can't our market not give 75 times returns over the next 25 years? No one has the right answer, but the direction is very clear. So enlarge your own vision and stay invested.

Mahalakshmi: Would you like to take a call on the coming year?
Nilesh: If you haven't invested in equity, bad luck. If you have kept on booking profits, bad luck. If you have stayed invested, good luck. You cannot swim without jumping into the waters. Jump in, get invested into the market. You may end up losing 5 per cent in three months, six months, but in five years you will surely have far more money. You have to have the same confidence in the economy as your global counterparts have.

PRASHANT JAIN: I can't add much to what has been said, but I may repeat a few points. There are two components to market performance - earnings growth and P/E multiples. I think earnings growth rates are slowing down. In the last three to five years, we have seen the benefits of lower leverage, lower interest rates, and significant cost savings which the industry embarked upon in the mid-90s. Of course, we have seen a cyclical upturn in commodity prices, which have helped a large number of stocks, and also companies such as Tata Motors which are cyclical in a different sense. I think those high profit growth rates are not sustainable. If we look at the next two, three or five years, we think that a 15-odd per cent growth rate is more sustainable.

Second is the issue of P/E multiples. We look at P/E multiples in three or four ways. One is to look at P/E multiples with a historical perspective. We have enjoyed P/E multiples between 15 and 25 for fairly long periods and those multiples prevailed when the interest rates were much higher. Today, rates are a lot lower, yet P/E multiples are lower than what they were in the past. I think there is a problem of frame of reference here. If you look at the last two or three years, then you find that P/Es have gone up. But if you look at the last five or 10 years, then you find P/Es are not unreasonable. Stocks don't seem to be undervalued now, but they are not overvalued either.

And then, you can look at P/Es with relation to growth rates. A 15 P/E for a globally competitive economy such as India is not very high. Especially, considering that there are a very few risks to economic growth. And the leverage in the economy is very low - both of corporates and of households. We also have very less export dependence.

Even in a regional context, we are right in line with regional P/Es, probably slightly higher, but I think our P/E should be higher than regional markets' because of low leverage, predominantlydomestic economy and large, diversified and growing economy. I am not worried on the P/E multiple count either. Taking a one-year call in the market is very hard. There is a time now that investors should invest only medium- to long-term money in equities. Growth is there, P/Es are reasonable. I don't think there is any bubble or any stretch case in the markets because P/Es are quite reasonable, and this market has underperformed the economy and profit growth rates for a pretty long time.

Finally, I think an investor should be prepared for volatility. Invest for at least three years with whatever money you can spare. But expect a 10-15 per cent volatility.

As far as funds are concerned, if the markets slow down, funds will also slow down. Now, sectoral valuations are more in line with underlying fundamentals. Therefore, I think outperformance of funds versus benchmarks will be a lot less in the next three years than what we have seen over the past three years. I think fund returns will be more in line with the markets.

A K SRIDHAR: The critical question today is whether liquidity will remain. My view is that there is no reason for liquidity to dry up, at least in the Indian context. The broad reason is that interest rates have been reduced over the past five or six years to 5-6 per cent from 16-18 per cent. The impact of this is still not fully felt by a common investor. Only when he realises it, will more money flow into equities.

A lot of money will come into stock markets when investors face a real life situation of lower interest rates. So markets could correct but with every correction a lot of people, who have not participated in the rally, will come in. And this correction will provide an opportunity for those who have missed the bus.

I broadly agree with the projections that corporate earnings will be 15 to 16 per cent. As far as my return expectations go, I would put it in a different way. I think if you are getting four to five times of the average inflation rate in equities, that is the best you can expect. Again, comparing debt with equity, I would say equity would give at least three times the return that debt would offer. MADHUSUDAN KELA: There is nothing much left for me. Nevertheless, I would say going by the history of the markets around the world, we are no where near euphoria. Considering the changed global circumstances, a historical perspective of markets is no longer relevant. For example, the Japanese index went up from 800 to 43000 within 30 years and the Dow Jones took 10 years to move up from 900 to 12500. What we have seen in the past 55 years in India may not be relevant for the next five to 10 years. This is because there are two fundamental things which have changed.

One is global outsourcing. Let me explain. I was in a coffee shop when I visited Scotland three months ago. I called the waiter and asked him, how much do you get per hour? "Nine pounds per hour," he told me. It very hard to believe that a guy who is serving coffee makes 90 pounds every day, and here in India you could find an engineer for Rs 5,000-7,000. I think till the time this basic paradox continues, there will be growth. We may differ on the rate of growth but I think 15 to 20 per cent growth rate is possible over the next five years.

Another point is equity ownership of Indians. We have Rs 8 lakh crore of savings every year and, in 2004, the stock market investment was Rs 12,000 crore. We have put in excess of Rs 2 lakh crore in bank deposits at 5 to 6 per cent interest rate when the inflation rate is also at the same level. So there is a lot to come. I think, equity investment-to-saving ratio of between 8 and 10 per cent is feasible in the long term. You could get something like Rs 50,000-60,000 crore of investment from India alone if this vibrancy remains. So I don't see any reason to be scared. However, your timeframe has to be much larger for you to make money in the markets. I don't think it is possible to predict what is going to happen in the next three months, six months or one year. But I would like to say that we are nowhere near the bubble.

MAHALAKSHMI: Well, that really sets a strong bullish undertone. Can anyone hazard a guess on the probable negative surprises that could change the market mood? NILESH: There is one risk factor which probably is not factored in and needs to be considered. Today, the politics of coalition is the fight between the Congress and the Third Front vis-…-vis BJP. Slowly but steadily BJP is being, kind of, marginalised and in state after state we are seeing an actual fight between the Congress and the Third Front. So somewhere within the ruling coalition, you could see a realignment of political forces, and those could possibly give a surprise which the market is not yet factoring in. Can those surprises lead to a May 17 (2004) kind of scenario? Absolutely. Will that derail economic reforms? Unlikely. But the market first sells and then thinks.

PRASHANT: I think economic growth is not at risk. This has been our view for so many years now. Sentiment of equity market is very different. And that can change in a day. I think globally, there are imbalances, there are strong appreciations of currencies; it could adversely impact profits of Indian companies. There is one risk I would like to add. Interest rates are harder to forecast than equity markets.

MADHUSUDAN: Any unexpected slow down in China could put pressure on the market; if there is any slowdown in the US or if the bubble bursts in the US. But we should take cues from how markets reacted to such unprecedented happenings in the past. In my 15 years of experience, I think May 17 (2004) was the best day for making investment in the history of India. In the last 55 years, we haven't had that day. More than 700 companies, which were trading above par value, went up by more than 100 per cent during that one year. So how we react to such situations is much more important.

MAHALAKSHMI: What about the state of the fisc? Or even the pace of economic reforms... NAGANATH: The state of the fiscal deficit and economic reforms is known and priced in. You need to tell me something that is not yet a concern or a worry that is not priced in. Only then it becomes a matter of concern. The market has got used to even oil prices at $62. Unless it goes next month to $100, I don't think that is a big concern. It may become crucial at some point in terms of inflation rate, etc. But I don't see anything domestically that is of any great concern to me at this point in time. SRIDHAR: I would add the risk of delays. Something not happening when we expect it to happen. But I don't see any long-term risks.

MAHALAKSHMI: What are your sectoral picks? SRIDHAR: I think anything to do with consumption will do well. Besides, infrastructure and core engineering should do well.

NILESH: Days of sector-specific rallies are over. Even in the last one year we have seen in every single sector a class of stocks delivering phenomenal returns and another class delivering pathetic returns. It is likely to be company specific - how the companies are able to participate in the growth and how they are able to deliver returns to minority shareholders. That will be the driver this year. So I would prefer to go bottom-up rather than top-down.

MAHALAKSHMI: Sanjiv, you are a top-down person. What do you think? SANJIV: We choose the sector first, then the stock. We are with only two sectors. First, consumer discretionary which covers automobiles, ho-using, media, white goods and other consumer durables. Second, materials which includes metals and cement. We are marginally overweight on banking.

MADHUSUDAN: We are bottom-up investors. However, there is one particular theme which I would like to highlight. In outsourcing, other than software, not much has been discovered as yet. Anything which will benefit in the next three to five years from the outsourcing opportunity should do well. There is a $40 billion spend on global R&D annually. Till January 2005, this was not an opportunity which we were aiming at. So companies, which can capture some portion of that global opportunity and build a business model around it, may stand to gain significantly. Similarly, in engineering, because of the euro revaluation that has happened over the last two or three years, a lot of work is shifting to countries such as India. NAGANATH: We like banking a lot. Financials as a sector, I

think, will always end up assuming a higher and higher proportion of the overall market capitalisation in a growing economy.

That has been the case in developed economies. In some bigger markets, financials, as a whole, at one point was as much as 40 per cent (of the total market capitalisation); for instance, in the US. I tell visitors that no matter how bad our physical infrastructure may be, our financial market infrastructure is robust. You don't get to see it, so you don't appreciate it. The second sector is engineering. Perhaps cement as well if you have confidence that the build-up of infrastructure will begin to accelerate. Not just over a year but for over three to five years.

PRASHANT: We are not seeing any under-valuation across sectors; so it is hard to say which sector will outperform the markets. But I think risks to sectors are quite different. And that is what we are focusing on. For example, the risk to cyclicals is commodity prices coming down; risk to IT comes from currency appreciating significantly. Oil companies have a policy risk attached to them. These are variables to which there are no clear-cut answers. MAHALAKSHMI: Which are the most risky sectors at this point? Prashant: We are not seeing evidence of any gross overvaluation. Similarly, we are also not able to spot opportunities in credible companies which have a reasonable record where there is, say, about 40 per cent undervaluation. I think returns will come as growth happens. That is why if you look at our portfolio, we are actually pretty diversified across sectors.

MAHALAKSHMI: So folks, that brings us to the end of this discussion. And once again thanks to all of you for taking time out of your busy schedules to make it to the BS Fund Cafe‚.

SHYAMAL: The panelists here have once again proved that great men do think alike. Thank you.