Inflation, high fiscal deficit, tough external environment, and non-performing assets in the financial system are not insurmountable problems, says Gopalakrishnan S, Chief-Investments, ICICI Lombard GIC. However, investors should not get complacent as is often the tendency, he adds. In an interview with Business Line , he emphasised the need for follow-up measures to contain deficit, inflationary pressures and to have an enabling environment to revive investment cycle.

Do you see markets climbing significantly higher from this point onwards?

We can look at it from a global and domestic perspective. The global equity markets have gained in a correlated manner largely driven by the recent wave of monetary easing by the western central banks. It is important to keep in perspective the circumstances that have led to unleash such enormous open-ended monetary measures without getting enamoured by these measures. There are several challenges ahead amidst a slowing global economy such as the fiscal restraints many governments are facing, the persisting Euro Zone issues, etc. Our equities were benefited by the coincidence of a strong external flows and the Government of India finally taking the right policy measures despite a tough political climate. The initial leg of the move is driven by the very change in the sentiments resulting in a re-rating of market value. This is largely dependent on continuance of further policy measures, swift implementation of measures already announced, further consolidation of fiscal conditions enabling some room for a coordinated action from the monetary side and the global markets sustaining the momentum. A lot depends on the outcome on the above conditions.

Will the reforms that have been unveiled actually translate into reality?

It is too early to comment given the current political climate. However, reforms being initiated on the fiscal and tax front are a very high possibility. What has been done on the fiscal consolidation is not much and a lot is yet to be done. On the areas like attracting FDI – raising FDI in insurance will require parliamentary approval, which is difficult to fathom now. There are many other areas where it can be done including environment clearances, resolving land acquisition related issues and addressing the fuel linkage issues and going ahead with disinvestments. The retail FDI as you know is left to the progressive States to implement.

With the markets on the rise, would this be a good time for retail investors to enter the stock market?

Depending on the risk appetite, retail investors can look at the market from a long term perspective. The long-term structural India story remains valid. For those who are looking at direct equities, there are many opportunities from a bottom-up stock selection basis.

What are the near-term concerns and challenges that you foresee for the markets?

Several headwinds continue to persist. They include inflation, high fiscal deficit, tough external environment, and non-performing assets in the financial system, high proportion of short term external borrowing, etc. For reviving the investment cycle, you need further policy push to speed up environment clearance, address the land and fuel related issues. Then, improvement in earnings outlook would follow allowing a revival of primary issuances to fund expansion or growth.

Which sectors are looking good and which are emerging as laggards?

Domestic-consumption oriented sectors provide a secular play. Within in those, two-wheeler sector looks more interesting for finding some long-term play while FMCG sector looks relatively expensive unless one is taking a call that inflation would remain very high in times to come. Banking and financial sector, media, oil refining and marketing, logistics, etc are some of the sectors looking good for stock picking. Companies in some of these sectors might report disappointing results, which are discounted to a large extent by the market but long term prospects look good. Apart from expensive FMCG, metals and mining, IT and telecom are a few sectors emerging as laggards.

In view of what happened on October 5 (freak trade), do you think that the industry needs more robust trading systems in place?

The industry is already armed with robust trading systems, so to say, and it means all the participants can have access to these systems to the extent they can afford. Depending on the operating level and the sophistication required, participants have adopted systems. The incident is a lot to do with internal risk management framework specific to the firm. May be the exchanges can think of upgrading the front office systems further for participants who don’t have their own proprietary systems to mange orders. The industry and the regulators have been very responsive to the lessons learnt from these kinds of incidences; we might see some positive developments on this front.

> sneha.p@thehindu.co.in

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