Market Voice: Sudhakar Shanbhag

'Markets may correct by 10 per cent'

Sudhakar Shanbhag, chief investment officer, Kotak Life Insurance, tells Priya Kansara Pandya how he perceives the Indian market by the end of the currrent financial year. Edited excerpts:

Market experts believe that Indian markets can touch the 20,000-plus level by the end of this year? Do you think the same?
Indian markets currently trade at about 16.5 times of the earnings of financial year 2010-2011. If we consider 20 per cent earnings growth in financial year 2011-12 and apply the same PE multiple, then Indian markets can trade between 20,000 and 21,000 by March 2011.

But are we headed straight up there, or do you expect a correction before that?
A correction is always possible before we get to 20,000-plus levels. I think a 10 per cent drop can happen.

There are a lot of support factors like economic growth, domestic consumption driven economy, petrol price deregulation, increase in gas prices and introduction of nutrient-based fertiliser subsidy. Moreover, a sluggish world economy is good for the Indian market in terms of inflows.

What are the risks you perceive?
Challenges in the inflow of foreign institutional investors’(FII’s) money persist, as any bad news can make investors risk averse. There are also India-specific risks like soaring current account deficit and rising oil prices (upwards of $95/barrel).

Final form of the Direct Tax Code (DTC) can also trigger a selloff, as investors would like to avail the benefit of zero per cent tax on long-term capital gains, which may cease to exist under DTC.

Market rally has been mainly driven by FIIs, while domestic institutional investors have not been very active. What do you think is the reason?
Yes, I agree that domestic institutional investors have been selling, while FIIs have been pumping in more money. While inflow for the first quarter of the current financial year has not been an issue for insurance players, selling is also a function of asset allocation strategy, comfort on valuations and cash position mandates.