‘Near-term outlook remains weak’

Last Updated: Mon, Apr 14, 2008 03:30 hrs

John Bogle, the founder of Vanguard Mutual Fund, is the single biggest influence in Apurva Shah’s life in the markets. “His thoughts and writings on the markets and the securities industry have shaped my views and understanding over the years,” says Shah, head of research, institutional equities, Prabhudas Lilladher. An engineer from Pune University, Apurva took a plunge into the markets after an MBA from city-based NMIMS.

After a brief stint with ASK-Raymond James (now JM Financial), he joined Prabhudas Lilladher six years ago. Shah shares his views on various issues in the market with N. Sundaresha Subramanian.

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Rising risk aversion has seen risk premium go up considerably this year. Do you see it swinging back to 2007 levels, when global stability comes?

I believe given the magnitude of the issues that the global economy is facing, the risk aversion will remain relatively high for the next year or so. The near-term outlook remains weak and I don’t see the euphoria of end 2007 returning for some time.

FII flows have dried down completely. Do you think lot of volumes has moved to SGX Nifty? How significant is the role of this instrument?

Some of the volumes have shifted there given the restrictions on hedge funds in India. It is not very significant at this point, however, if we remain rigidly regulated, then not only index futures, but also many other financial products will move offshore.

Companies are likely to face difficulties raising capital in the current scenario. A number of companies from capital goods and construction sector might find going difficult. But, you are overweight on these sectors as per your quarterly report. What are the reasons?

We expect the current difficulties in raising capital to ease off over the next few quarters, as valuation expectations of corporates adjust to the new market realities. Over the next two-three years, we believe this sector will remain one of the highest growth sectors in India.

What is your view on banks and financial sector? Will the recent fiasco of derivatives and the legal tangles cripple the banks down for long?

For the near-term we are cautious, but for the long-term we find a lot of value in the banking space. The magnitude of the derivatives issue for banks has been greatly overestimated by the media and the markets in our opinion.

Recent regulatory moves in terms of short-selling, DMA, margining and fast track issues are aimed at making markets more efficient. In the process, things would happen even faster and potentially spiral out of control easily. Are the clients and intermediaries ready for more digital economics?

I disagree that introduction of these measures will increase the risk for the markets. If anything it will add to the liquidity, price discovery and efficiency of the markets leading to lower volatility over a period of time. The market players have been long ready for it, but it is the regulators who are now probably ready as well.

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In the growth vs inflation dilemma, if the government decides to sacrifice growth, what will happen to the markets, which are already beaten up? Do you see a time-wise correction? If yes, for how long?

Yes, if monetary conditions are tightened leading to a slowdown in growth it will have a negative impact on the market over a period. Some of this is probably in the price already, but any tightening will still be bad for the market in the near-term.

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