'Expect 15% returns in the next two years'

Q&A: Anand Shah, Head-Equities, Canara Robeco AMC

Though the bailout package for Greece brought some cheer to the global markets, doubts remain about how long the party will last and the impact on domestic markets. In an interview with Chandan Kishore Kant, Canara Robeco Asset Management Company’s head of equity, Anand Shah, says despite the overhang of the sovereign debt crisis, abundant liquidity and earnings growth should lead to 10-15 per cent returns in 2010-11. Edited excerpts:

Will events in Europe affect FII (foreign institutional investor) inflows?
While the markets are fairly valued, they have moved up due to liquidity. The same liquidity will not be there if there is risk aversion and FIIs will not be chasing emerging markets. There will be outflows with some corrections, though not as severe as was the case a year before.

Any FY11 predictions for equity markets and Sensex earnings?
It's difficult to re-create what happened last year, when stock markets almost doubled. Never expect these kind of returns, as it happens once in a while. From here on, one should look at equity markets growing in line with earnings, as valuations are fair. If you look at the estimates for the Sensex, they range between 15-22 per cent. This will hold true for FY12 as well.

Do you expect more monetary tightening? How will this hit capex plans?
Tightening will happen if there is growth. We expect another 100 basis points hike in rates during FY11. For equity, it is good as long if one is invested in the right companies. Tightening hurts companies that are hugely leveraged. So far, the impact has been less due to enough liquidity. However, if oil prices start going above $90 a barrel, it will start pinching.

Which sectors are you betting on?
Banking is a sector we are positive on from a long-term perspective. Going a step ahead, we are also positive about the consumption story. Between 2002 and 2008, domestic savings have grown four-fold, which is helping banks double balance sheets. Banks are the main beneficiaries of domestic savings. Over the last five years, gross domestic savings in India were at $1 trillion and will be $2.5 trillion in the next five years. Apart from banking, we are bullish on pharma, FMCG, auto, organised retail, media and telecom sectors. In stocks, stick with large caps till there is clarity on the sovereign debt crisis.

Any sectors you are underweight on?
We don’t like highly-leveraged companies and we don’t have companies that are into commodities. On real estate, we do not find much value in the listed space. And, for cement, this year will be tough.

What about inflows into equity funds this year? Are investors comfortable enough to put money into equity schemes?
The last two years were very tough as volatility scared away retail investors. If global liquidity keeps markets up, it will not help. We will see good interest from retail investors only if there is a 10-15 per cent correction and the market stays there for a couple of months. We need a little bit of low volatility to attract investors to the equity segment. However, people have no option but to invest in equity. I agree this may be risky, but then not investing in equity is definitely risky. We are living in an inflationary world. The coming years will not be different. If one wants to create wealth, one needs equity.

How do you rate recent IPOs?
Rightly-priced IPOs (initial public offers) not only bring in new investors but also confidence. Companies run by good managements at acceptable valuations will help market sentiments. But, at the same time, IPOs that take away a lot of money but do not deliver will spoil the party. So, investment bankers will take a huge risk in keeping the momentum going and making sure that something is left on the table for investors.

Unfortunately, investors look at the primary market as a safe place. This, however, has gone for a toss now with highly-priced IPOs. On the PSU front, a little bit of hard work by investment bankers is required. The IPOs from the government are not bad but could have been marketed better.