December 31, 2010

Kotak MF overweight on Equity in 2011: Asset Class Outlook
Wishing all our investors a joyous and profitable new year, we bring you a quick outlook from Kotak Mutual Fund on different asset classes in 2011.

by Dhanashri Rane

Untitled Document

Mr. Krishna Sanghvi, Head (Equities), and Ms. Lakshmi Iyer, Senior Vice President and Head (Fixed Income and Products) from Kotak Mutual Fund outline the major drivers and risks for the markets in 2011 by sharing their views on different assets – Equities, Fixed Income, Commodities (including Gold) and Currency. They also lay down their standpoint on the asset classes for 2011.

Key points from the interview

  • Current interest rates are at elevated levels and offer good investment avenues within the fixed income space
  • Asset allocation to emerging markets equities will increase
  • Prospects for Gold promising due to flows from Quantitative Easing, economic uncertainty arising from Euro zone’s debt problems, political tensions in Far East Asia and rising jewelry demand in China and India
  • Rupee is expected to maintain an upward bias given the gradual decline in US dollar value, as well as the significant surge in forex flows

Asset allocation for 2011

  • Equities – Overweight

  • Fixed income - Neutral

  • Commodities  - Underweight

  • Gold - Neutral

Macroeconomic environment

iFAST: What macroeconomic themes do you see in 2011?

Krishna Sanghvi: The major themes that would play out in 2011 would be:

  • Emerging markets consumption will keep prices firm for
    • Metals with resources remaining firm
    • Agricultural commodities
  • Low interest rates will support asset inflation in geographies with strong economic growth
  • Globally the growth engine will be driven by emerging markets with developed markets lagging

iFAST: What are the big risks that might derail the markets in 2011?

Krishna Sanghvi: The following are the major risks:
  • Euro zone’s sovereign credit crisis
  • Reversal of monetary easing
  • Fiscal tightening by governments across the world
  • Regulatory actions on financial conglomerates

Fixed Income

iFAST: What is your outlook for fixed income in 2011?

Lakshmi Iyer: We believe that the last vestiges of the inflationary impact from the agriculture supply shock, which had resulted from the failed monsoon in 2009, would have petered out by early 2011. This may in-turn considerably allay the political sensitivity pertaining the food inflation. However, the structural inflation in the food products may continue.

We also believe that the divestment process and Fiscal Responsibility and Budget Management (FRBM Act was implemented to control deficits and bring fiscal discipline in government borrowing)  restrains too may be pursued in an increasingly diligent manner. Therefore, there is reason to be optimistic for larger part of the upcoming year. Current rates are at elevated levels and pose good investment avenues within the fixed income space.

iFAST: What risks exist for fixed income in 2011?

Lakshmi Iyer: The price escalation from imported commodities, especially oil, is a key risk. The outcomes of the monsoon season for the next year too cannot be anticipated. Additionally, the major element covering the fiscal deficit in the current financial year has been the non-recurring capital receipts like 3G auction sale. Therefore, the alternative revenue channel to fill in that gap in the following year is not yet clear. Also, the quantum and pace of equity IPOs too may be detrimental for the liquidity condition, and therefore for the market.


iFAST: What is your outlook for commodities in 2011?

Lakshmi Iyer: Speaking specifically for gold, the prospects seem largely optimistic. The dollar outflow through Quantitative Easing (QE) has already seen many central bankers increase their allocation for gold to hedge the value. The rising economic uncertainty surrounding the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt solvency is also a key factor in gold demand. Also, the political uncertainty in Far East Asia is expected to continue as the imminent change of guard in N. Korea and China may keep the other nations’ policy-makers guessing. The security uncertainty in the middle and south-central Asia too may support the gold price. Most importantly, the rising income levels in India and China too is likely to keep the jewelry demand for gold robust. With the global liquidity likely to be comfortable through next year courtesy QE2, commodities are expected to do well.

iFAST: What risks exist for commodities in 2011?

Lakshmi Iyer:  A slowdown in China as a result of rate hikes remains to be a key risk for commodities in 2011. Also, any measures taken by government to ward off a potential bubble like scenario would also weigh on commodities market.

Emerging equities (particularly, India)

iFAST: What is your outlook for emerging market equities in 2011?'

Krishna Sanghvi: Positive on economic growth and markets

iFAST: What is driving the performance of emerging market equities in 2011?

Krishna Sanghvi: For the emerging market equities in 2011, the following factors drive performance:
    • Asset allocation to emerging markets will increase
    • Better GDP growth relative to developed countries
    • Strong earnings growth for corporates
    • Rising per capita income
    • Better financial stability of banking system (notably India)

iFAST: What risks exist for emerging market equities in 2011?

Krishna Sanghvi: In 2011, the risks that exist for emerging market equities would be:
    • Delayed economic recovery in US/Europe impacting the emerging economies
    • Monetary tightening in US/Europe
    • Sovereign credit crisis in Europe worsening
    • Strong crude oil prices (notably for India)


iFAST: What is your outlook for currency movements in 2011?

Lakshmi Iyer: Rupee is expected to maintain an upward bias given the gradual decline in US dollar value, as well as the significant surge in forex flows although RBI can be counted on to keep the currency equation largely palatable.

iFAST: What risks are there for currencies in 2011?

Lakshmi Iyer: Economic and high political uncertainties are the two key variables that significantly alter the currency equation, which in case of US$-INR does not seem to be a possibility.

iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.


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