WF: How do you see the road ahead for the markets? We have seen a vertical rise over a six month period March to Oct 09 and then a two month period where the markets seem to have been struggling for direction.

Amit: Let me just start from a little more than the just the rise part of the market. We saw a fall from 21000 to 8000. The last part was an excessive fall - for extraneous reasons. Also we failed to make a low in the months of Oct-Nov08 that is when especially the Chinese market made a bottom for the simple reason that investors are not ready to come to the country where the political stability was at question mark. And after that, the Satyam issue happened in January and we had a bottom in our markets in the month of February and March 09.

The first leg of recovery started when we saw some return of risk appetite, when some of the US banks said maybe the worst is over. Then, in Apr-May 09 the results of our elections was something like a black swan event nobody had expected and that is why we saw the sharp upswing of 20%. Since we had fallen beyond the normal valuations levels which were justified given the growth in India, we reverted very quickly and that is why the rise we see since March is almost a vertical rise. Now having said that we have already come to a level wherein we have almost doubled from our fall and in terms of valuations we are not looking cheap any more.

Now as you very correctly said for the last three months, markets have been consolidating because of the fact not only that incrementally there are no more earnings surprises but also because inflation is looking up at a pretty sharp pace. There is a fear of an aggressive monetary policy which is keeping the market from continuing the uptrend. Lot of the inflation concern is supply driven - primary food articles etc., which obviously a rate hike cannot solve. But anyway the RBI would in all sense try to keep the expectation of this inflation low.

As the result we would probably have to consolidate at these levels for some time till investors start focusing on the FY11 numbers. The visibility of the FY11 numbers will be higher in a couple of months. We could see some earnings upgrades for two reasons, the first is this inflation which we are seeing will help lot of corporates in reporting better toplines than we what expect today and the second thing is the Indian corporates have been very severe in cutting costs. So they are actually running on a pretty good cost structure. So there would be lot of margins surprises going ahead.

WF: So you think that this a consolidation that is likely to go for maybe a month or so and then you might see the markets reacing higher levels.

Amit: Yes, probably yes, provided we don't have any unpleasant things happening in the global world like sovereign debt default scares etc.

WF: There are fears that as global Central Banks begin draining out liquidity some time in 2010, there could be a negative impact on markets.

Amit: That is a valid concern and I should say a possible reason for the markets getting spooked, but that is the time when people will be far more cautious in making the choice of the assets where they want to be.

For example, you see with so much of liquidity around, crude oil has not made a new high but gold has. Crude is a commodity where we have seen lot of demand and supply factors actually not being in favour of crude being a stronger commodity. For the commodities we have seen the prices come back at a pretty sharp rate. Sugar has reached a new high - so wherever the commodities have a favourable demand supply scenario, that is where the money will go. So also in terms of equity markets for example India and China are offering good growth as compared to the global world. You will find people coming to the equity market here. Maybe pulling out money from the countries where the growth is questionable

WF: Talking of India and China, you are one of the few fund houses in this country which has a product that invests in exactly these two big growth markets : China & India. Briefly, how do you see the prospects for the Chinese markets and what would therefore be the investment case for your India-China fund?

Amit: We are very favourably disposed towards both the Chinese and Indian market for the fundamental reason that these two are at the largest population bases. These two countries put together have almost 40% of the world's population and the good thing that has happened over the last 2 to 3 years is that they have gradually moved their per capita income upwards to over US$ 1,000 per annum. And historically what we have seen across economies at different points of time is that whenever in an economy the people have touched that kind of an income level the consumption in that country had taken off at a very sharp pace. India's per capita income has now crossed the US$ 1,000 mark and China is already above that mark. These two countries is where we are going to see a tremendous consumption growth.

China has so far been an export driven economy. But, with the massive fiscal stimulus package that the Chinese Government which was focused towards building more of infrastructure and also creating consumption demand, their economy looks very well positioned to continue growing briskly.

We believe that people who will invest in these two economies will definitely make money over a period of time.

Let me clarify, the Chinese part of our fund (around 30%-35%) is managed out of our Hong Kong desk - we don't manage it out of here. It is a direct investment into stocks and not a feeder.

One of the other benefits - other than participating in two of the fastest growing markets is that it gives you a good diversification as the Chinese and Indian markets generally do not move in tandem. The Chinese markets bottomed out much before the Indian market and also rose faster and earlier than the Indian market in this rebound.

WF:. Coming back to our Indian markets, do you presently favour midcaps or large caps?

Amit: We have seen a lot of top down money entering India over the last 6 months - which typically goes into large caps. Once large caps gt ahead of 16x or 17x in valuations, people start picking up the mid caps, if we consider India to be back on the growth track. Then, the growth for mid caps tends to be far more than the bigger companies and in the stock markets money chases growth. We therefore believe that going forward, mid-caps should do well.

WF: Within the mid caps space are there any particular themes that looks attractive to you at this point of time?

Amit: At this point of time I think there are lot of capital goods stocks and construction names that are still available at the pretty cheap valuations as compared to their larger peers.

WF: What is your view on pharmaceuticals?

Amit: Pharmacetuticals is a interesting space. In fact the other day we were looking at the health care index which has actually made a new high and that too very recently. While the market has not made a new high, the health care index has. While a lot of money has gone into markets, people probably are still not so sure about the recovery that is happening and that is why whoever has been forced to put money has gone and invested in relatively safer stocks, which are consumer names and health care names.

WF: What's your view on the banking sector now?.

Amit: We are favourably inclined towards the banking sector for the simple reason that if our GDP growth is 7% to 8%, in peak times, credit growth is typically 3 to 4 times GDP growth. We should therefore start seeing credit growth of 25% to 26%. Once that happens, then the big concern that people have had for the last 12 months which has been on asset quality - will be taken care of.

So what we believe is that the valuation today especially for the PSU banks, we find that lot of them trading below book still on their FY11 numbers. PSU banks offer both good growth opportunity as well as valuations comfort .

WF: Are there any sectors where you are cautious on at this point of time?

Amit: In terms of caution, some auto companies growth numbers have been very good and they have been beating analyst estimates but valuations today do not offer too much of a comfort. That's a sector where we are running underweight. Among consumer names some of them have run up too sharply - because of the safety aspect.