Aseem Dhru, managing director & CEO, HDFC Securities, says that high commodity prices, inflation and interest rates are likely to slow corporate earnings and the targeted returns from the market by year-end may be around 15 per cent.
With the market looking uncertain, should retail be investing in stock markets?
For retail investors with a lower risk quotient, stock picking is not a good idea. Besides, it is impossible to predict the market ups and downs. We recommend a systematic investment plan (SIP) through mutual funds.
While it averages out the return, it also averages out the risk. For direct market participation, we recommend Nifty exchange-traded funds (ETFs) or index funds.
Where do you see the market heading in 2011-12?
The inflows from foreign institutional investors of $29 billion last year gave the markets above-normal liquidity. This year, the trade has reversed in favour of the developed markets.
Selling emerging markets and buying developed markets are the current consensus. Fresh allocations to India may, therefore, moderate to about $15 billion this year.
The disinvestment target announced in the Budget is higher than last year and should encourage flows, if priced right.
High commodity prices, interest rates and inflation may moderate corporate earnings growth from an estimated 20 per cent to 15 per cent.
The Sensex earnings this year should be at Rs 1,225 with the index at a reasonable price-to-earnings multiple of 15. It means a fair value of the Sensex at 18,375.
The targeted returns at the market level may be around 15 per cent by year-end from current levels.
Where do you see the inflation and interest rates?
Tight liquidity driven by monetary policy will check money supply and keep it expensive. As banks' loan growth is stable, they will focus on the liability-side double-digit deposit rates.
Monsoon will play a major role in controlling inflationary pressure. A 25-basis point increase is expected each monetary review till inflation eases off.
Should retail investors consider midcap and smallcap stocks right now?
Midcap and smallcap stocks fall more sharply than the frontliners due to liquidity issues, risk aversion and their size.
Sentiment is still weak and one can also not rule out another round of selling in these segments.
As it is difficult to catch the bottom of the market, one can buy quality smallcap and midcap stocks at every dip.
Or, invest through SIPs in proven midcap ETFs or open-ended midcap mutual funds and later switch to direct equity.
Given the sharp spike in commodity prices, should retail investors keep these as a part of their portfolio?
Commodities must be a part of an inflation-protected portfolio. But they have little downside protection. Focus on commodities with a long-term demand and/or supply threats such as oil or copper.
However, these companies must be well-integrated backwards to withstand the shock of rising prices of raw materials.
The demand for gold and silver could be sluggish for the next few months. Investors must have a portion of their assets in gold or silver, which they can gradually buy.
But remember, silver is a high beta version of gold, that is, it rises and falls more sharply. Investors should take about 10-20 per cent exposure to both gold and silver, depending on their risk appetite.
