1st February 2012

WF : Global markets have rallied significantly in Jan12 and are further cheered by the US Fed pledge not to raise interest rates till 2014. Is this a purely liquidity driven rally or are the fundamentals globally shaping better? How sustainable is this rally?

Srinivasan : Since the fundamental state of affairs continue to remain uncertain and dependent on certain key events, it is difficult to predict how risk appetite would pan out during the year. Suffice it to say that given a 'status quo' it is likely investments into emerging markets and India would be much better that what we have seen during 2011. The assumption of a 'status quo' may however not be the most probable scenario. For now, at least, given the benign market reaction to the French downgrade, risk is 'on' and all eyes seem focused on the Greek debt re-structuring and the LTRO

Simply speaking, this does seem to be a liquidity driven rally. There is no indication that fundamentals globally are shaping better except for some positive signals from the US. However, as we have seen in the past, liquidity rallies have sustained for pretty long periods of time!

WF : Is our market rally purely a high beta play on global liquidity or can we take some comfort that our market's low valuations have found appeal among FIIs?

Srinivasan : Our market rally is a combination of global liquidity, a low base (given that India was one of the worst performing markets in 2011) and a likely bottoming out of economic fundamentals in terms of the interest rate cycle and the currency situation. We could definitely take comfort on valuations which are meaningfully behind median levels post the downgrade cycle. It is important to note, however, that sustainability would be a function of an eventual pick up in the economy and the capex cycle

WF : In times of cyclical downturn like now, conventional wisdom suggests allocation towards large caps - yet, these are also perhaps the best times to pick good quality small and midcaps. Are you finding good quality names now in small and mid caps, which are sustaining their growth momentum? On balance, would you advocate investing now into a large cap oriented fund or one that focuses on small and mid caps?

Srinivasan : The decision to invest in mid and small caps is theoretically a function of the view of the market. Given that they are high beta, as a group, they would tend to out-perform rising markets and under-perform falling markets. Having said that, excess return in a mid cap strategy is largely a function of superior stock selection and we would believe that is present in any market cycle. This bear market has been different in the sense that it has been strongly biased towards quality and it that context it is difficult to find quality mid cap names in the current scenario

WF : Are you seeing any improvement in on-ground activity to justify optimism on the infrastructure sector? Would you be a buyer in this sector today?

Srinivasan : No, we are not seeing any improvement in the on-ground activity to justify optimism on the Infra sector. I wouldn't be a buyer yet.

WF : Which are the sectors that you believe will lead the next bull market?

Srinivasan : We are currently overweight Health Care and Consumer Discretionary on our large cap strategies and underweight Utilities and Materials. Health Care on account of earnings growth visibility, high returns on capital and lately the rupee depreciation. Consumer Discretionary is a mixed bag wherein we are selectively positive on certain auto and media stock. Utilities on account of concerns on coal availability at the back end and SEBs at the front end. Materials on account of concerns on China and the global growth uncertainty

WF : How are you currently positioning your portfolios - are you more defensively positioned or are you - at the margin - getting into growth / cyclical plays? Which sectors are you investing in now?

Srinivasan : We were mostly defensive on our large cap strategies for the whole of last year. Since the last couple of months, we have been incrementally increasing beta at the margin. So, if our portfolios were overweight defensives (including cash) by around 15%, that overweight has now come down to 5%. Like earlier mentioned, we are currently overweight Health Care and Consumer Discretionary on our large cap strategies and underweight Utilities and Materials

WF : What are the key risks to the Indian equity market that you would be watchful about?

Srinivasan : It is important that the economy recovers and so does the capex cycle. Most investors assume that is a given on the back of a monetary policy reversal but that may not be so. The fiscal deficit and the political scenario are also factors to closely watch for.