Mkts to trade rangebound, amid volatility: Lotus AM

Ajay Bagga, CEO, Lotus Asset Management said the markets will trade rangebound, marked by volatility. “The range has been established and we have to go through a timewise correction. A price correction has already happened. The good news is that he market seems to be getting support at these levels and seems to be coming back.”

Excerpts from CNBC-TV18's exclusive interview with Ajay Bagga:

Q: Where do you see the market headed in the short-term? Do you think we might hold these levels or is the market going to drag lower?

A: The fundamental thesis remains. It’s a rangebound market, marked by volatility. The range has been established. We have to go through a timewise correction as a price correction has already happened. The good news is that the market seems to be getting support at these levels and coming back. As time passes and corporate earnings catch-up, valuation will reach a level where one will see fresh money coming in from global investors. In a way it’s a stronger market than it was six months back. It will take sometime for a timewise correction to go through this market. Overall, it will stay rangebound market, but there will be opportunities to do bottom-up stock picking. That is what is going to work in this market.

Q: How do you read this pullback in the interest rate sensitives like banks, and real estate now? Do you see just a pullback rally happening here or are these stocks showing any signs that they have hit the worst and bottomed out?

A: A lot of banks were under one-time price to book. That was making them look a compelling story, especially if one is looking at earnings per share, and compound annual growth rate in the range of 20% for the next two-three years. If one looks past the next one year of little turmoil in the economy, one does see a stronger India story ahead. So, those factors are helping banks to bounce back. It is on a much sounder footing.

I am still not very convinced about real estate. There is lot more pain in the physical market as far as real estate goes. There is a funding crunch on in the market. Those are not going to go away in a hurry. Banks are not able to lend too much and the other sources of finance are not that easy to come by. Foreign sources have also dried up. Real estate might see more of a bounce back, but we are quite convinced with bank financials.

The other good thing about banks is that they are able to pass through the pricing, apart from nationalised banks which have political compulsions and have not been able to pass through. Other banks are quite adept at passing through interest rates. So out of the three ‑ auto, banks and real estate ‑ interest sensitive, I would say banks are in the best position both on valuations as well as on growth drivers.

Q: While there are still signs of domestic institutional investor activity soaking up all the selling pressure from the foreign institutional investor side, what are you hearing about mutual funds and whether they have been deploying more cash these past few days?

A: If one looks at numbers for DIIs, they are trending towards USD 4 billion year-to-date. So, out of USD 5.8 billion of FII selling, DIIs have absorbed about USD 4 billion which is a very strong predictor for the market now going ahead. We look forward to the day when DIIs are able to control this market and are able to make a direction in this market. It’s a matter of one-two years.

Savings are there in the economy, and those savings are coming largely through the insurance and mutual fund equity route. That will make a very strong base for these markets. In the Korean market, FIIs have been net sellers over the last four years but household savings have stabilised it. I am sure we will see a play like that happening in India.

In terms of mutual fund collections, the numbers are low. May was about Rs 1,000 crore of net inflow. Insurance, this is the off-season, flows are slower normally in unit link insurance policies in the first quarter, because people are not looking at investments or tax savings. So, we do not expect too much newflows to come in, but there is a good corpus of about Rs 3,000 crore in mutual funds and insurance sitting on all the collections of the first quarter.

We have some good amount of money and probably that’s what is fairly supporting the market, because high networth individuals or operator participation is lacking in this market. It’s probably the DIIs who are giving support to this market.