'Sensex to hit 22,000 by December 2010'

Prudential Investment Advisors, which operates in India under the Pramerica brand, is bullish on emerging markets, and on China and India in particular.

The company, which has an insurance joint venture with DLF, is expected to enter the mutual fund space shortly.

In an interview, Prudential Managing Director and Chief Investment Strategist John Praveen tells Chandan Kishore Kant and Sidhartha that the Sensex could hit 22,000 by the end of December 2010 but advises against investing in gold. Excerpts:

The recovery that started in the second half of 2009 will be sustained in 2010. We are not looking at a double dip in the global economy. We expect the US GDP growth to be around 3.5 per cent whereas Europe and Japan will grow around 2 per cent.

The Chinese economy should grow at over 10 per cent, while the Indian economy will grow at 7.5-8 per cent. Growth in China is an important dynamic for other Asian economies such as Japan and Korea. Our own expectation is that growth is likely to surprise on the upside than on the downside.

How different is this recovery from the past recoveries?

In the past, the rebound was very sharp. The first year after the recovery, the GDP growth had been around 7 per cent. However, this time, we are looking for only a 3.5 per cent rebound, which is more modest compared to the historical average. We are not going to get a V-shaped recovery.

Rather, it will be more flattish like a Nike-shaped recovery. A lot of countries have announced stimulus packages but the entire money has not been used. So, some of that will be used in 2010. Moreover, countries like Japan have more stimulus in the pipeline. Two, interest rates are much lower now than in the past recoveries.

Three, in the US, inventory levels are at the lowest since 1949. With such low inventories, one cannot run a business. This will see companies ramp up production. Four, the US housing market is beginning to stabilise.

We are starting to see a rise in construction, which will add to GDP. Also, low capacity utilisation and high unemployment is keeping headline inflation under control, which means inflation is a sweet spot.

On interest rates, the US Fed should start rising rates only in the fourth quarter of 2010. Japan is not going to raise rates next year and the Bank of England may raise rates in the fourth quarter of 2010. We expect corporate earnings to be quite strong. So, we have a very favourable background for the stock markets.

So, where are the stock markets headed?

For the S&P 100, our target is 1,300-1,350 by the end of December 2010. In case of the Indian markets, we expect the Sensex to cross the previous highs. The target is 21,500-22,000 by the end of December, 2010.

We are very positive on emerging markets. We are overweight on emerging markets and within them we are overweight on Asia's emerging markets. Within this, we are most positive on India, China and Korea.

What about the bond markets?

We expect yields to rise in 2010. Stronger GDP growth is going to be a negative. A general increase in risk appetite will be another negative for the bond market. As far as credit markets are concerned, we expect they will outperform the treasury market as the spreads have not still narrowed.

In recent weeks, there have been concerns over large capital flows and Brazil has already moved in that direction. Do capital controls affect the investment strategy and allocation?

If you look at the fundamentals of economies such as Brazil, they are still quite strong and we are very positive on them. Maybe we are a little less bullish that we were in 2009.

If India was to put in place curbs, will it result in investors shifting a part of the money to other markets?

The government has again said that there are no such plans. People put capital controls if the market is taking some kind of a bubble proportion. We need to look at each case individually.

The government has set up a committee to look at, among other things, investment through the participatory note (PN) route. There have been demands for putting an end to the window. How do you look at it?

If transparency is there, there is no strong reason to put an end to something. FII registrations have increased significantly in the last few years. This shows that over a period of time, P-Notes will die a natural death.
Also, when it is so easy to get an FII licence and get an access to the market in a broader and transparent way, there is no reason to go through the P-Note route. The arbitrage has come down quite sharply.

Would you advise your clients to invest in gold because some people are predicting that it will rise further?

No, we are positive on commodities such as industrial commodities, but not on gold.