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"Time to go back to the basics"

May 14, 2008

Nilesh Shah
Nilesh Shah
Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management Company, talks about the current market and the strategies that investors should adopt in the changed market realities in an interview with BT’s Krishna Gopalan. Excerpts:

Q. What do you make of the stock markets today?
A. The last four years of this bull run has spoilt the investor’s habits. I think a lot of money was made quite easily. That dream has now come to an end and it is very clear that the time has now come to go back to the basics. Interestingly, between 1992 and 2004, we had virtually the same level of index, but the four year period starting from 2004 changed quite a few things.

Q. Do you think there is any reason for the investor to panic in a market like this?
A. The investor should be concerned but should certainly not panic. The market, after the correction, is definitely looking more attractive. Investment, it must be said, is not about gambling. Rather, it is about taking rational decisions. The investor should understand that. Overall, it needs to be said that the India story is looking good and there is clearly a growth story. The investor will do well to go in for a strategy that involves asset diversification.

Q. What would you advise an average investor in a market like this?
A. There are four key rules to my mind. First, investors have to understand that the equity market is going to be risky and volatile. Secondly, it is absolutely necessary to take a long-term call on investments— at least 3-5 years. Thirdly, I think it will be futile to look to maximise return and instead one should look to merely optimise it. This will be possible if the investor has a diversified portfolio comprising equities, fixed income, commodities and real estate. Finally, do not listen to rumours. Instead, work on your own gut feeling.

Q. What are your key concerns in today’s context?
A. I think inflation is one major concern, but then, it is rising globally. In fact, even in India, it has been moving upwards over the last one year. From a global perspective, I think the situation in the US is a cause for concern. However, the Indian stock market has had more downsides than the US market. Lastly, a lot has been said about interest rates. This, to my mind, is not an issue since our corporate earnings are not highly leveraged.

Q. There is a school of thought that India is stretched on valuations. Would you agree with that?
A. Yes, we are expensive. There is certainly a premium compared to emerging market peers. But it also needs to be understood that the return on equity in India is far higher.

Q. Are there any sectors or stocks that look interesting to you? Where does an investor put his money in a market like this?
A.Typically, if valuations are lower, there should be a higher proportion of one’s investment in equity and in case of higher valuations, that proportion should be lower. Speaking about sectors, I will only say that an investor should not go for stocks or sectors if he is not willing to give his investments enough time to grow. Basically, an investor needs to ask two simple questions about the company he wants to invest in before making a decision: whether that company will be around in the next 10 years and whether it will make more profit in the next 10 years. If the answers to these questions are in the affirmative, the investor should go ahead and invest in that company.

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