We expect mid-caps to outperform in 2010: Mirae Asset's Gopal Agrawal

He feels India is fairly valued, if not expensive, at these levels. However, there are a host of opportunities still available for investors,

especially in the mid-and-small-cap space, the important thing being that one should be able to identify them early on. Meet Gopal Agrawal , CIO and head (equity), Mirae Asset Global Investments, who, in an interview with ET, advocates a stock-specific approach for 2010 and advises investors to buy companies having good business models with high debt as risk taking is back.

Where do you think the market is headed in the coming year, and what do you see as the key driver of sentiment?

We expect global markets, including emerging economies, to continue with their upward trajectory in 2010, though we don’t expect returns to be as spectacular as they were in 2009. The strong co-ordinated actions taken by various governments and central banks across the globe in terms of stimulus and fiscal packages have already started to show effect and major economies have come out of global recession though all the news flow is still not positive. However, the important thing is that positives are now overweighing negatives.

The TED spread (difference between interest rates on inter-bank loans and short-term US government debt) having narrowed down and VIX (volatility) index also back to normal levels indicate that investors have regained appetite for risk. From here on, company-specific news flow, earnings and GDP upgrades will determine the market direction. We expect investors to make superior risk-adjusted returns if they are able to invest in well-managed equity diversified funds

India has been the beneficiary of sustained capital flows into emerging markets, so much so the central bank was considering controls. Do you expect this trend to continue or are we headed for a pause?

Yes, India has witnessed sizeable capital inflows in the past. Its strong and resilient consumer demand, impressive IIP numbers and GDP growth of around 7% during the period of severe global recession makes India a favourable investment destination for FIIs. We believe that if the Indian government is able to take progressive steps towards curtailing fiscal deficit and increase infrastructure spending, it will give further fillip to FII inflows in the country.

What is your view on earnings? Some believe that earnings may surprise on the upside in 2010. Do you agree?

We expect earnings growth of over 20% in FY11E, but rising commodity prices, strong consumer demand and expected CAPEX boom could surprise earnings on the positive side.

Do you see a possible shift in investment strategy for 2010? What are the themes you see being played out?

We believe that in 2010, a stock specific approach would be able to generate superior risk adjusted returns compared to the conventional top-down sector-specific approach. As economies across the globe emerge out of recession, we expect strong growth of over 7.5% in BRIC nations, which will lead to resources, infrastructure spending and corporate CAPEX-related themes being able to deliver relatively superior returns. In addition, given the current scenario of high global liquidity and benign interest rates, we would advise investors to buy companies having good business models with high debt as risk-taking is back. Any equity infusion will improve sustainability of company’s growth and deleveraging of its balance sheet.

Where would you advise investors to park their money sectorally, or even by asset classes? What would an ideal basket be?

We expect mid-caps to outperform in 2010, because of superior earnings growth, valuation discount to largecap and risk taking coming back into action. We would advise investors to pursue a prudent asset allocation with exposure to equities, gold and resources. In the resources space, we would advise investors to take exposure to agricultural and bulk commodities. We are also selectively positive on pharma and IT companies.

The mutual fund industry has been going through some tumultuous times over the past few months, and mutual fund investments seem to have taken a back seat with equities being looked at more favourably. Your comment?

We expect investors to invest more favourably in equity mutual funds in 2010 as they have recovered their losses from most of the schemes and are, in fact, sitting on decent gains. Given that bank deposit rates are low amid a rising inflation scenario and a return of investor aptitude towards riskier asset classes, including equity, retail investors should definitely increase their investments in equity mutual funds in the coming months.