'Only miracles, bubbles can result in returns like 2009'

Q&A: Nilesh Shah, Deputy Managing Director, ICICI Prudential

Investors are hoping for another bountiful year in the equities segment, as amidst fears of a correction, the stock markets have jumped in recent days. ICICI Prudential Assets Management Company Deputy Managing Director Nilesh Shah speaks to Rajesh Bhayani on the outlook for the next year and how investors should approach it. Edited excerpts:

Is what has been seen over the last few days just a Christmas rally or has it sown the seeds for a bigger rally in 2010?
We have already seen a rally in 2009. Markets across geographies were pessimistic in the early part of the year and governments provided a push in the form of stimulus packages that involved pumping in liquidity, reducing rates and fiscal concessions to prop up demand. Based on all these factors, the markets bounced back and are now trading a tad above the fundamentals.

 

In India too, all this happened and there is now a stable government at the Centre. Foreign fund flow is continuing. The rally should be seen in this background. The low base effect has gone and an optimism effect will depend on how it (hopes/expectations) is translated in reality. A gradual withdrawal of stimulus measures, resulting in lower liquidity, and a marginal increase in interest rates, will remove the push-effect. Now, the markets will rise only if the real economy runs on its own. Hence, 2009-like returns will not be available unless there is a miracle or a bubble forms. Rational investors should not expect this.

While 2008 was an embarrassment, can one expect the returns seen during 2004 to 2007?
Those returns were available as the market had consolidated during 1992 to 2003. That is not the situation now and so that kind of return will also not be available now. In 2010, returns from equity markets might be significantly moderated.

What are the factors that can limit growth in 2010?
Today, financial markets are a tad higher than the fundamentals. The markets are at the higher-end of the range and no more cheap or attractive. If the fiscal deficit comes out higher than what is discounted by the market or if the dollar index appreciates for technical or fundamental reasons, the markets will correct. But, if the actions on the ground are meeting the optimism factors, then the markets will remain a tad above the fundamentals.

Traditionally, foreign institutional investors (FIIs) declare their allocations for various markets. Will it be as high as what was seen in 2009?
That traditional theory when FIIs were allocating their portfolios for various markets at the beginning of the year is no more in vogue now. In the short term, their investments depend on dollar movements and if the dollar index appreciates, some flows might reverse, leading to a correction in markets like India. In the long term, however, India continuous to offer better opportunities and FII flows may continue.

What should investors do now?
They should simply remain investors and not become traders. Often, they are tempted to trade in equities and invest in fixed income. They should just not do this and rather invest in equities and trade in debt till they find opportunities to invest in equities. They should enter the market when it is correcting and keep investing regularly. In short, investors should start early, do proper asset allocations and maintain discipline.

What will be the theme for 2010?
It will be the year of consolidation across asset classes. With the support of the stimulus and pumping of liquidity, prices of equities, real estate and gold have gone up significantly and now they should consolidate, as it will be a year of stock picking and range-bound movements.

What will be the strategy for mutual funds?
Mutual funds (MFs) will also have to do stock picking and try to outperform the market. In 2009, the gap between returns from equities and debt was very large, but in 2010, this gap will get narrower. MFs should also be prepared for gradual withdrawal of liquidity by banks, which will be diverted towards credit.

How is the wealth management scene changing?
Earlier, people thought their children would take care of post-retirement requirements. This basic philosophy is changing now and a person has to plan for his retirement himself.

Till date, most investments are in fixed income and hardly anything is in risk assets, which has potential to generate higher returns. Now, the basic structure of wealth management is changing. Investors should start putting trust in wealth managers and financial planners, who will help them diversify their portfolios.

One thing should be kept in mind; even financial planners can generate only optimum return and not the maximum return. The approach of investors towards financial planners should be similar to doctors. Even if an illness is not cured, you go to the same doctor for further advice. Like a family doctor, one should have a family financial planner.