HDFC Securities managing director and CEO Aseem Dhru says the stock market, which has

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turned volatile since Diwali, will remain on the softer side till the end of the calendar year 2010 and will scale new highs only in the first half of 2011. In an interview with Sanjay Vijayakumar, Dhru said the correction after a steep rise was a good sign for a long-term bull run. Excerpts:

The market has turned volatile with swings on both sides? What is your take?

Since the beginning of this calendar year, the market has seen handsome gains and it is one the few markets tending towards its all-time high. Recently, there was a flurry of bad news coming in on the domestic front while the globe scene too remains uncertain. As a result, the market has been skittish and nervous. On the other hand, the market is not very cheap. No doubt, there is inherent strength; but bouts of weakness and selloff are only to be expected.

Where do you see the market by end of calendar year 2010?

The market is expected to be little on the softer side going into the end of this calendar year. We see it scaling new highs only in the first half of calendar year 2011.

On the valuation front, is the market fairly valued at this level?

The consensus earnings estimate of the Street for financial year 2011 is Rs 1,055 per share and we expect it to be Rs 1,025 a share. So at 19 times the consensus earnings, India is not overbought compared with global markets. We are getting the growth premium, which is justified. Anything more than this, we would be entering an uncertain territory. In effect, periodic correction and selloff after a steep increase is always a good sign for a structural long-term bull market.

Do you think the recent scams will hurt foreign investor sentiment and fund flows?

Unfortunately, there has been a flurry of news around the 2G scam and the recent Sebi action over insider trading. All of it has come in quick succession and this has definitely raised questions over corporate governance. This will play on investors' mind, especially those who have lost money on the Satyam scam. Questions have already been raised and it appears these are the result of individual greed and misuse of power. But if the contagion spreads and becomes a systemic fault, then it is a cause for concern. People are nervous and watching it carefully. After the news break, mid and small-cap stocks and companies with questionable management and governance practices have seen the maximum selloffs.

Do you see the euro zone debt crisis as a concern for our market?

The nervousness over the euro zone and the news flow will keep the world markets on the edge. Balance sheets of countries or companies cannot be repaired in a day. Sovereign debt was build over a period of time. Today, markets are coupled tightly to liquidity flows.

Any negative news will be a dampener for the market. No one is clear about the steps that are going to be taken. The euro zone is going to be a cause of concern and panic for the market till the first half of next year.

The GDP numbers have been reassuring? The economic advisor has hinted at an upward revision of the forecast? What would be the impact on the market?

The weak IIP numbers for the second consecutive month had spooked the market. There were concerns that industrial activity and capex cycle have slowed down and recovery has slowed down. In that sense, the GDP numbers have reassured investors on the Indian growth story, which has already been factored in valuations. The strong numbers have helped sentiments and stopped further erosion in market valuations.

What is your take on the public sector issues? Moil has seen tremendous response? Will the PSU issues suck out liq uidity from secondary market?

On the contrary, good IPO papers create liquidity in the market. For example, in case of Coal India, we saw a lot of first-time foreign investors subscribing to the issue. Whenever there is a good IPO issue on the block coupled with good liquidity, there is always a good response and it attract long-term investors. Quality share issues are definitely a positive for the market in terms of liquidity.

What are your views of the quantitative easing measures (QE2) in the US? There was an expectation that the market will go up further post QE2, but it has gone down?

The market was expecting QE2 four months before it was announced. The market had already rallied in expectation of QE2 and there was a selloff when it came in line with expectation. The real impact of QE2 would be seen with a lag. The Fed has to start asset repurchases and capital injection, which will then come into emerging markets. The real impact will be seen in the next calendar year. So, hot money will chase higher returns and the impact will be felt on commodities and emerging markets.

There is talk of possible unwinding of dol lar carry trade when the US starts tightening monetary policy? Is that concern real?

A huge amount of liquidity has been injected into the system and nobody knows or has an answer as to how to suck out this liquidity when developed economies recover. Now the US and Europe are trying to save their economies from going into deflation by infusing capital. The world is not yet done with the 2007 meltdown. These will have strong after-affects, by way of creating asset bubbles in property and commodity sectors.

So, it's hot money chasing better returns in emerging markets? Countries like Brazil and China have put curbs on hot money flows? Should, India follow these examples?

India's current account deficit has exceeded 4.2 per cent of GDP this year. What this means is our imports have been more than exports, resulting in higher absorptive capacity in the economy. So the country has the ability to absorb the $30 billion inflows that have come in. So there is no concern of any structural imbalance. But India needs to keep a close watch on this.

After the correction, which sectors look attractive to you and what are ones you would be avoiding?

We are seeing signs of the capex cycle returning in India. So, one should look at financials, infrastructure, cement and capital goods and agricultural plays like fertiliser and nutrition. Consumer staples and discretionary can underperform. Investors would be better of staying away from real estate.

Your advice to retail investors?

All the noise made in the market makes retail investors nervous. Many retail investors have stayed away from the market, which is unfortunate. Ignoring these noises, the market has given 15 to 16 per cent CAGR return in any 10-year time frame. Retail investors have to see the alternatives and choose the best tax-effective investment return option, which is equities.

The best way to participate in the GDP growth is the market. Retail investors should understand that timing the market is difficult and one needs to pick up quality stocks for a longer term, which will give superior returns. For them, the question is not whether to invest in the market, but what is the best means to invest.