• DECEMBER 30, 2005

“I will say that you should have exposure to equities, irrespective of whether the index is at 9,000 or 5,000…”

In an interview with equitymaster.com, Mr. I. V. Subramaniam, Head of Research, Quantum Asset Management Company Private Limited, shared his views on global and Indian stock market and what strategy should investors adopt in 2006 and beyond.

Eqtm: What is your view on the global markets, especially when one considers the fact that interest rates have hardened significantly in the last two years? There were also fears that it will impact money flow into emerging markets. What is your view now?

Mr. Subbu: In our view, US long bonds should be at 5.5%. If you had a chance to look at the article written by Mr. Joseph E. Stiglitz in Economic Times on December 29th 2005 in which he is saying that we do not know when it is going to happen. It is more likely to happen in 2006 than 2005. So, it will affect. You know, interest rates around the world will increase, especially in the US and peoples risk appetite will reduce. That will impact all emerging markets, including India.

Eqtm: Morgan Stanley’s (led by Stephen Roach) global economy team view on India ”We see India as a candidate to experience the kind of capital flight that hit Southeast Asia in 1996”. What is your take?

Mr. Subbu: I do not have a view on whether there will be a capital flight from India or people will be scared of India. But I think there will be more rational allocation of portfolio money to equities in emerging markets as a whole. I think South East Asia is a very small economy as compared to India. The sustainability of long-term economic growth rates in India is much more certain than Malaysia and Singapore. India has got a much more stable and a much more long-term dynamic economy that South East Asia. We think what he meant by capital flight was that probably, the short-term guys, particularly the leveraged ones, that type of money could be withdrawn.

Eqtm: When the market is as bullish as it is today, what strategy should a retail investor adopt? Should he opt for the direct investing route or should he invest through mutual funds?

Mr. Subbu: See, both are exposed to the equities, whether you do it on your own or you do it through a mutual fund. So, decline in the equity markets will affect you any ways. So, whether you should choose to invest directly or through a mutual fund are not a function of the market, but more a function of your individuality. You need to be sure whether you have the time and energy to go through each individual stock in which you are investing. In addition to that, I presume that your risk appetite is higher if you directly invest in a few stocks. If your risk appetite is not very high, then it is better to go through the mutual fund route because you might get a much-diversified portfolio compared to building a diversified portfolio of your own. And the cost of going through the mutual fund route could also be lower.

If you do it on your own, you might pay a higher brokerage while if you go through a mutual fund, the overall cost could be lower. In the end, my answer to this question would be it depends on your energy level, your interest in researching stock, your risk appetite whether you want to have a focused portfolio, which you can build on your own or you want to build a diversified portfolio, in which case it is better to go through a mutual fund. Therefore, irrespective of the market conditions, we at Quantum AMC would always recommend that you should have some exposure to equities. And depending on your risk appetite, you decide whether you want to invest through mutual funds or directly.

Eqtm: There is a consensus that has build up in the last one and a half year that since the market is rising you, invest in a systematic manner so that the costs are averaged out. This method could work well in a rising market. What happens if the market falls? Should one continue to invest in SIPs (Systematic Investment Plans)?

Mr. Subbu: No, I think SIPs will still be advantageous at these levels, because in SIPs what you do is that you earmark a specified amount of funds that you want to put into a mutual fund, whether a debt or an equity fund. The idea is that you are going to build this portfolio over a very long period of time. So, it is more of a discipline. Instead of taking a view on where the market currently is or where it is heading that involves too much of judgmental call and which may or may not turn out the way you expected, it is better to have a discipline of investing a specified amount. This is for some people who are comfortable with that way of doing it. The advantage as you said while the markets are going up, you benefit. The same holds true when the markets are going down, because you will land up with more number of units, if you are investing for lets say, Rs 10,000 per month. From the investing perspective, it does not matter because what you are exposed to is Rs 10,000 per month. The idea in this that you will accumulate in this fashion over many years, assuming there is a secular trend in the economy. So at some point in time when you want to offload everything, you will be able to gain substantially by having larger number of units. The strategy works, if the market is up or down. It is mostly a matter of discipline.

Eqtm: While questions have been raised with respect to the sustainability of the current stock market rally, what are the dos and don’ts you would suggest for investors?

Mr. Subbu: Our style at Quantum AMC and what we would also suggest to investors is not to time the market and you should have some exposure to equities at all times. So, I will say that you should have exposure to equities, irrespective of whether the index is at 9,000 or 5,000. It is more of an asset class that you should be into. The earlier question, which you asked whether, you should invest directly or through mutual funds, if you invest directly, then you should exercise caution at these levels. You should be careful about the type of stocks that you invest and there should be adequate margin of safety.

Eqtm: Which sectors are you more positive looking at 2006 and beyond?

Mr. Subbu: Quantum AMC, has still not launched its first fund yet. It will happen in the next month or two. However at this point I am positive on technology, pharma and consumer discretionary (including automobiles and media) and utilities.

Eqtm: What is your interest rate outlook for 2006? Should investors invest in debt funds?

Mr. Subbu: Our internal assumption is that interest rate will move upto 7.5% (10 year paper). As far as investing in debt funds is concerned, it is more a function of your risk appetite. Debt looks attractive but at the same time, in a rising interest rate scenario, you should be careful about the type of debt funds you buy. Probably, you need to invest in low duration debt funds.

Eqtm: The last time we interviewed you in March 2005, you said ‘it is good time to invest in equities”. In October 2005, you mentioned that you are 30% cash. What is your strategy now?

Mr. Subbu: We still have, at the Sponsor level, for the PMS clients, around 18% to 30% cash, depending on the clientele. For the Indian clients, the Sponsor is at 18% cash level.

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