Q: The Indian equity market has risen substantially this year. Can this rally last, or is it just a cyclical bounce?

A: Yes, the rise has been sharp and significant especially since the second quarter of the calendar year and there will be corrections on the way. But the fundamentals are in place for the rally to last. The move in the market has been very broad based across all sectors and there appears to be makings of a structural run rather than a cyclical run. One must however be cognizant of extraneous risk factors and the fact that India faces central elections in 2004.

Q: Are valuations for the broad market still attractive, or have they become overpriced in light of the run-up? Please elaborate.

A: The valuations for the broad market continue to remain attractive. At its peak, the Sensex quoted a P/E (price to earnings ratio) of over 30 times. Whilst this currently stands at about 13 times, at its lowest, the P/E ratio was only about 9 times. The fact that interest rates have collapsed should cause the P/E to go up, which has not happened. A good indication of the quality of earnings is the surging spread between Return on Equities (ROE) and interest rates which is at its highest ever.

Q: Which stocks do you like the most now and why?

A: The portfolio of the fund is a fair mix of various sectors which are capturing the competitive advantage of the country. The outsourcing story and the domestic strength of the economy seem to be the best plays in the market and therefore stocks exposed to these two factors in particular are the ones which have the biggest weightage in the portfolio. We expect the prime IT services company in India - Infosys - to grow its profits by at least 20% for the coming two years. This is our biggest holding. Ranbaxy the leading exporter of generic drugs to the US markets, is growing strongly with huge potential spread over many years to come. This is our second largest exposure. A direct play on the domestic economic cycle is India's leading commercial vehicle producer Tata Engineering. This is our third largest holding. A growing economy also makes it imperative to have exposure to the banking industry and we hold the biggest Indian bank - SBI.

Q: Why does the fund have its biggest sector weighting in consumer stocks? (19% as at end June 2003) Are you bullish enough on domestic consumption to increase this weighting in the near future?

A: Our big exposure in the pharmaceuticals sector (which is classified under the consumer category) has caused our weighting to be the highest in the consumer sector. We are actually bearish on the consumer staple industry. There is a marked shift in consumption trends in favor of consumer discretionary, and away from consumer staples because of rising disposable incomes and greater spending power. Our only exposure to the consumer sector is in ITC - the tobacco major because of the steady nature of its business, huge cashflow generating abilities, and cheap valuations.

As mentioned earlier, the Indian pharmaceutical majors are big exporters of generics to the regulated markets. And the cost being less than a tenth of the companies in these countries, the growth and profitability for these pharmaceutical companies is very high and sustainable.

Q: The fund's second largest weighting by sector is in technology stocks (18% as at end June 2003). Do you intend to maintain this weighting? Why?

A: Yes, we do intend to maintain this weighting in technology stocks. Admittedly, the fund had a huge hit when one of the top companies gave a lowered profit growth guidance in the month of April. But since then there has been a remarkable turnaround. There is huge volume growth available to these companies arising from the strength of the outsourcing trends and a recovery in technology spending in the USA, signs of which are visible could stabilise the margins for the IT service companies which have been falling. In addition, the Indian technology companies have been increasing the scope of work that they have been doing and therefore the market area available to them is also much higher. The valuations which were astronomical, in hindsight though, at the peak of the technology run in 2000, appears reasonable with income and profit growth continuing unabated.

Q: What is the outlook for telecom and pharmaceutical stocks? Are you bullish on these 2 sectors? Why?

A: Telecommunications as a sector is showing high growth especially in wireless and in terms of minutes of usage. Heavy competition which came along with the opening of the telecom sector has reduced the cost of telephony significantly. The losers therefore have been the incumbents - the public sector telecom companies. While there are only a couple of companies in the private sector listed in the telecom arena, we are bullish on their prospects. To give an indication of growth, the number of cellular subscribers have been growing at more than a million per month.

We are more positive on the top line pharmaceutical companies which have established themselves as players of repute in the generic space in the USA and compete with all the global generic majors. Pfizer Inc. in the US for example has lost close to US$ 30 billion dollars of market capitalisation as Ranbaxy - one of the top ten generic companies in the world has filed for an application to sell "Lipitor" one of Pfizers blockbuster products.