Krishnamurthy Vijayan, MD & CEO of IDBI Asset Management, has been a self-proclaimed bull

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for the past two decades when it comes to investing in the India story. In an interview, he says in the long run, stock markets draw strength from the overall economy and there aren’t many negatives to doubt India’s potential. Excerpts:-

The Indian economy seems to be on a roll again if you look at the GDP growth numbers. What does this mean for primary and secondary markets?

Evidently, this is very positive for the market, but it must be remembered that after the elections of 2009, the past 15 months or so have seen a strong runup in India in anticipation that the global economic crisis will have less impact on India than on any other market. In the short term, we may continue to see bursts of growth and profit booking. But I am optimistic about the long-term trend as the market draws strength from the overall economy. It works like this. A fast-growing economy means company profits grow as well. After all, they are an integral part of the economy or vis-à-vis. And higher company profits mean higher stock prices, i.e., a positive for stock market.

Suggestions that the US economy could go into another round of recession have surfaced. Is that scaring you?

Another US recession is of course a serious concern for the every country, but remember India has received an unfairly small proportion of global investments. Most of the economic growth that we see is domestically funded and fuelled. My view is in the next few years we will get a fair share of global investment allocations, as there are very few economies that can offer even a fraction of this growth, with this regulatory environment. So you may find, in the longer term, a slowdown in the US economy may actually benefit India. There is yet another long-term structural benefit that I believe India is likely to see — that of increasing outsourcing by developed economies like the US. And this will directly and indirectly benefit our companies across sectors. For example, the most obvious beneficiary will be the ITES sector. But an indirect beneficiary will be the consumer and real estate sectors as growing number of IT professionals — with higher disposable incomes — will spend more on both consumer products and real estate.

Q1 results did not throw up any major surprises. Analyst downgrades have happened. What’s the way forward for the market?

Often when I look at analysts’ expectations and the market’s reaction to them, I am dismayed by the mood swings. India is not built in quarters and if they expect things to happen in that time frame, they are probably living in a dream world. In my view, these are not analysis, but sound-bytes. The market will have the same general trajectory as the economy. Moods of traders will drive short-term volatility, but I’d urge your readers to ignore this completely.

What are the pockets/sectors that are likely to deliver above-average earnings growth in this financial year?

Banking and financial, ITES, most service sector plays, education and of course automobiles look like winners over the next few years. I think in a growth economy, every sector is going to throw up leaders and these will be winners in an investor’s portfolio. That’s the reason I favour index funds over any other method of investing in equity for retail investors.

Realty and cement stocks have seen some interest off late. What are your views?

The real estate sector is becoming increasingly more transparent and the availability of formal financing has been a great advantage. The cement sector has seen some excellent ‘turnaround’ stories, but in my view, given our own domestic requirements, this sector can be a great long-term investment. Given India’s size (geographical and population), the need for creating infrastructure remains very high. We, as a country, are today able to meet only a small fraction of the roads, ports, railways needed, let alone building enough for the future. As this accelerates over time, there will emerge shortfalls in the supply of commodities like cement. China is a classic example of the same. In spite of being among the largest manufacturers of cement, it is also one of the largest importers. In my view our government is likely to continue to progressively bring about policy changes in order to accelerate investments in these areas. And it does not take a genius to guess that the cement industry will benefit from it.

What are the potential risks in your portfolio of stocks given the forgettable Q1 scorecard?We run index funds, where we are constrained by the composition of the index. Do you feel passively managed funds present a more investor-friendly proposition than actively managed ones now (at current market valuations) or forever?



Yes indeed. While there are expert reports that prove the point much better than I can, let’s look at the perspective of a typical retail investor: one who is not into full-time investing. He has many preoccupations and wants equity exposure with minimum risk. Think of the many risks that he takes when he enters an active fund, themes that have no relevance to him but look like a good story, strategies that he takes on trust and fund managers who may be riding more on luck than skill. On the other hand, if he picks a passive fund he has the option of buying stocks that have been tested for liquidity, free float, market representation, and invariably for governance standards. Then they are composed into a scientific basket to represent a market or a sector. This is done by an independent professional body, which does not manage money. I think the choice is obvious, unless you really, really seek entertainment from investing.

Just seven months away from March 2011, many long-term investors seem to be of the opinion that Sensex will be near 20,000 level. Do you agree with this view?



This is certainly possible, and reasons are simple as already discussed earlier. First, India’s domestically driven economy will ensure continued robust economic growth. Secondly, India will be among the few countries that are likely to show robust GDP growth, even as developed economies face a real threat of stagnation, if not a slowdown. This leads me to believe that the Indian market can attract higher allocations of overseas funds — a bullish sign for the market. However, I must also caution you that the equity market at this time is exposed to downside risks too, arising mainly from global uncertainty, domestic inflation concerns and interest rate hike expectations. I would advise retail investors not be swayed by such expectations for the short-term, but focus on long-term growth opportunities that our economy has to offer.

An interesting phenomenon witnessed in the market is that almost everybody is negative on the market. Why are you not in the same boat?

I have not been negative on India in the long term for the past two decades. I don’t see any reason to begin (to be negative) now. But seriously, which nation does not have constraints of negatives? We have to analyse the size of the opportunity, the track record of thousands of promoters and the general direction we have been taking since the 80s. Then pessimism will look like a trading call.

(Krishnamurthy Vijayan is the MD & CEO of IDBI Asset Management. The views and opinions expressed in the interview are personal.)