Nilesh Shah, president-corporate banking, Axis Bank, spoke to Puneet Wadhwa on the markets.

The markets have been drifting lower on account of global and domestic macro-economic headwinds. Have the economic developments at the domestic level last week made you more cautious?
 
It is always difficult to predict how the markets will pan out in the short term as there are too many variables that impact the movement.
 
From a valuation point of view, the Nifty at about 13 times one-year forward earning or 2.6 times trailing price-to-book is now attractively valued. Surely, it is not as cheap as it was in the second half of 2008. In that sense, there is a possibility for it to go down before moving up.
 
I believe that the Nifty will give a combination of a time and price correction rather than just sharp price correction.
 
Lower GDP growth forecast, dismal index of industrial production (IIP) figures and inflation woes. How much worse can things get for the Indian economy from here on?
 
The brightly shining Indian economy is getting clouded and most analyst are predicting that this is likely to be a longer lasting eclipse (though  definitely not a sun set, like many European nations) than a hide and  seek that usually occurs with India.
 
However, in the dark clouds there is a silver lining. A lot of Indian issues can be solved with relative ease by taking appropriate steps.
 
The central bank has pointed out that the downside risks to growth have increased. Do you think that we may not be able to achieve even the revised growth estimates? Have the markets factored in the worst?
 
Yes, the market has factored in the worst which is at present visible. It will be fair to assume that market today is pricing in growth below 7%, Inflation above 7% by March 2012, interest rates at 8.5% on 10-Year Gilt, tight liquidity for rest of the FY12 and Rupee trading with a downward bias to may be 54-55.
 
If the macro numbers come in better-than-expected, then certainly the down side will be limited. In some sense, the chances of positive return in 2012 appear higher as markets are trading at a level first seen in mid-2007.
 
Do you find value in any sectors / stocks from a medium-term perspective?
 
In our opinion, one will have to create a blend of high risk high return (aggressive) and low risk low return (defensive) sector allocation. In the defensive space, pharmaceuticals and export-oriented companies, especially in technology and engineering sector, are worth investing.
 
In an aggressive allocation, one can look at companies in small and mid-cap space, which do not have too much of debt, whose future growth is reasonably assured and are trading at  less than 5 times one-year forward earning. One can also look at banks that are trading at lower-end of valuation range on a historical basis.
 
What would you advise investors about next year in terms of asset allocation? Is it time to shift out of less risky assets such as equity and invest more into debt?
 
It will be fair to assume that in the near term equity, the markets will be very volatile with a downward bias as deterioration in macros along with global turmoil will keep investors on the edge.
 
However, at the first signs of actions being taken to support growth, containing deficits and correcting macros will be great opportunity to go over weight in equities.
 
My recommendation is to strictly follow asset allocation suitable to your risk profile and buy in a falling market. This market may turn out to be a “Buy on Dips" rather than “Sell on rallies" market if the corrective actions are taken in the near-term.
 
One can invest across large as well as mid-cap stocks. Large-caps tend to move first in a recovery where as mid-caps give more return in the second stage of rally. There is no substitute to mix of top down as well as bottom up analysis trying to pick up good companies in good sector at good valuation.