'Valuation in Indian equities fine but debt still better'

Debt remains the most preferred asset class for Indian fund managers, according to the latest fund managers’ survey by ICICI Direct. High yields and expectations that interest rates could decline in 2012 are the two factors behind the preference for the asset class.

Almost 75 percent of fund managers believed 10-year bond yields will hover around 8.5-9 percent, although some of them expected yields to be above 9 percent. Short-term debt funds remain the favourite instrument because of high interest rates.

As far as equity markets are concerned, 75 percent of managers did not expect any further downside from current levels. In other words, they didn’t expect the Sensex to drop below 16,000 by the end of March 2012.

According to the survey, fund managers think while investors could maintain their allocation to equity markets at these levels, increasing allocations to stocks right now was not advisable.

One key difference between the latest survey and the previous one is that none of the fund managers believe Indian equities are overvalued now. About 19 percent of fund managers are bullish on Indian markets, up from 13 percent earlier, although a majority still remained neutral about the short term.

Globally, the euro zone crisis and high fuel prices are two major risks for Indian equity markets going forward.Most fund managers also cut the earnings outlook for the Sensex by about 10 percent for the year ending March 2012.

Due to increased volatility, large-cap stocks remained favourites, although mid-caps appealed to some managers.Fast-moving consumer goods and pharmaceuticals continue to rank as the top sectors for investment. Some fund managers are also betting on information technology; stock-specific picks in infrastructure and capital goods could also fetch good returns.

However, investment interest in financial services, automobiles, metals, telecom and oil and gas has slipped, the survey added.