One cannot be a pessimist knowing that most shocks have been managed with speedy action by policy makers, Akshay Gupta, MD & CEO, Peerless Fund Management, tells Puneet Wadhwa. Edited excerpts:

What is a realistic assessment of how much the Reserve Bank of India (RBI) can slash rates in the upcoming review and in FY13, given the index of industrial production (IIP) figures and the wholesale price index (WPI) data for May?
Lower GDP (gross domestic product) and more recently lower industrial growth have highlighted the issue of having lower interest rates. One needs to address the credit growth without fuelling inflation, which is a larger concern at the domestic level. Thus, RBI would not have much leeway unless the sticky inflation comes down. For FY13, we can expect a 50-100-basis point reduction in reserve ratios and a similar cut in repo, if inflation falls further.

Would you be a buyer in rate-sensitive stocks at current levels? What is your strategy at Peerless now? Which sectors/stocks are you overweight and underweight on?
The markets have been challenging in such an uncertain global and domestic scenario. We believe in companies which can endure all cycles with high return on equities. Reversal of the rate cycle has begun. Short-term interest rates have fallen over three per cent from the highs reached in March. We are higher-weight on rate-sensitives and believe domestic themes like consumption and investments would give decent opportunities over the long run. Apart from banking and finance, we like sectors which relate to capital goods, technology, FMCG and automobiles.

It has been a news-heavy week with developments across the Euro zone and China, key economic data at the domestic level and statements from S&P. What is your assessment of these developments?
News flow from the Euro zone is critical for the markets. Currently, the key concern is of contagion spreading to countries not in the consideration list. Add to that the extent of unknown damage in the financial systems of the existing names, which will make the markets jittery.

The Greek election over the weekend will decide whether the austerity plan suggested by the European Union is an acceptable proposition for Greece. The expected Chinese slowdown is adding fears to lower global growth. Moreover, the below-normal domestic macro numbers has led S&P to make a statement about India facing the risk of losing Investment-grade rating. While these concerns are for real, too much of negativity is built around it. One cannot be a pessimist knowing well that most recent shocks have been skillfully managed by speedy action by influential policy makers. Disintegration of the Euro zone or a crisis in the financial system can hardly be afforded by any country, however strong.

In the Indian context, do the current market valuations of around 12x and the fall in P/BV to 39-month low inspire some confidence in equities or is it just a statistical number, which doesn’t adequately reflect the gravity of the macro-economic headwinds?
Market valuations are not expensive anymore and this definitely gives us some margin of safety. However, the point to be noted is that valuations statistics play an important role only if the earnings visibility is intact and that there is no crisis-like situation.

One needs to keep realistic growth targets factoring moderation in earnings on account of these macro headwinds before arriving at valuations.

Do you think the corporate earnings have bottomed out or there is more pain left to endure given the rupee-dollar equation, the levels we may see on inflation and economic growth over the next few quarters?
Recent corporate results indicate that although moderation of revenues is still on, margins seem to be reviving on a sequential basis. Lower commodity prices and softening of rates should further help the bottom-line.

Strengthening dollar is improving export competitiveness but making imports costlier. Hence, highly leveraged companies, which have a higher reliance on imports will continue to be in pain for some more time example - metal companies, which have over-leveraged themselves.

The mutual fund industry has been grappling with slowing retail participation on one hand, while it has seen M&A’s and exits from the top corporate slots on the other. How do you see things panning out going ahead?
MF industry, like any other, has had its share of pain for the past five years on account of stagnancy in markets, viability of business models, and poor rate of acquisition of customers vis-a-vis other products like insurance and fixed return/tax -free bonds, frequent regulatory changes and the very nature of variable return product.

We see a fair number of acquisitions and stake-sales continuing to happen. That said, we feel that the worst for the industry is behind us and the steps taken by the industry to increase focus on retail participation have started paying off.

Retail customer has started believing in other less volatile asset classes (fixed income and gold) beside equity and that is healthy for the industry.