'India's attractiveness is still intact'

India was one of the worst performing among emerging markets last year. But Anup Maheshwari, executive vice-president and head of equities & corporate strategy, DSP BlackRock, says the long-term attractiveness of investing in India remains intact. He also expects a lot more volatility, but does anticipate the market experience to be better than in 2011.

How are foreign institutional investors (FIIs) viewing the recent developments across the euro zone? Is there a solution in sight?

There is nervousness in global markets regarding Europe's ability to develop an imminent resolution to the sovereign debt crisis. The markets are looking for a solution faster than what political compulsions will allow.

Thus, it's reasonable to speculate that FIIs are skeptical and nervous about the situation in Europe. This is evident by the depreciation seen in the euro against the dollar.

Although the European Central Bank has taken measured steps to find solutions to the crisis, we do not believe Europe is nearing a permanent solution.

Does India still figure as a preferred investment destination among emerging markets (EMs)?

India was one of the worst performing EMs last year, due to a combination of global and domestic factors. Rising oil prices and a depreciating rupee took a toll on India's fiscal position.

A sharp rise in interest rates, a succession of corruption scandals and a slowdown in the investment cycle additionally hurt India's attractiveness for foreign investors.

Against this backdrop, the FII outflow of only $500 million in 2011 was a positive surprise, compared to the outflows experienced by other EMs. This year, investors will closely watch the variables mentioned above and the stock market valuations (in addition the state elections) to gauge India's relative position as an investment destination.

However, the long-term attractiveness of investing in India remains intact, and we do expect some investors to use the current slowdown as an investment opportunity.

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How are FIIs viewing the so-called 'policy paralysis' with respect to the reform process in India? Do you think these concerns are somewhat overdone?

In a world where India is competing for investments, any slowdown in growth or decision making is bound to have a negative outcome.

Besides headline reforms, it's critical to see a climate conducive to doing business in an efficient and transparent manner.

Policy flip-flops and delays are concerns for investors and the government's decisiveness in an uncertain environment will do a lot to change the sentiment.

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What is your strategy at DSP BlackRock? Did you move into cash in the process of the fall in 2011? What are your top picks (sectors) in the current market conditions?

The returns of the DSP BlackRock Equity Fund during January-November 2011 outperformed the CNX500 benchmark by 4.40 per cent.

During the period, our decision to maintain a defensive strategy and allocate a higher weight to the consumer discretionary and healthcare sectors helped the fund performance. The year 2011 saw the equity market going down every quarter and, hence, a defensive strategy worked well.

Going forward, we expect a lot more volatility, but we do expect the market experience to be better than that seen in 2011. In this context, we are looking for value investments in some of the interest rate sensitive sectors.

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Are you looking to increase your exposure to the interest rate sensitive sectors?

We are looking for value investment opportunities in interest rate sensitive sectors. The Reserve Bank of India has already articulated its view that the cycle of rate increases is at its end and monetary easing is likely to come through.

While the growth concerns are likely to continue for a while, we feel there are attractive valuations in select rate- sensitive stocks that could produce significant gains over a two- to three-year period.

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What are the downside risks to the earnings growth? Have the markets factored in the worst? What are you advising your clients at this juncture?

Although the Indian market has already seen a Rs 10 per cent downgrade in earnings and may see continued pressures in the December and March quarters, we believe the 2011-12 earnings growth could be near 10-11 per cent. What will be more relevant for the market, though, is the outlook for the 2012-13 and 2013-14 earnings.

At this point, we do expect a sub-15 per cent earnings growth for 2012-13. This is partly reflected in market valuations, which are below long-term averages. As such, we are advising clients that the market could be volatille this year, and they should look to invest in any sharp correction. The consolidation of markets over the past four years is gradually building a strong case for good long-term returns.

Do you expect growth in China to slow and, hence, demand for commodities getting dampened in 2012?

China's growth is already seeing signs of a slowdown. The government has been proactive in taking steps to create a soft landing and adjust to a slower growth rate. A slowdown in China is already being partly anticipated in commodity prices. The key risk here would be if growth decelerates faster than expected.