Andrew Holland of Ambit Capital Pvt Ltd says that the Budget failed to address concerns on growth and the CAD. The market is expecting additional easing from the ECB and the BoE with the US debt issue and Italy as an overhang on the equity markets, he adds.
"India will remain the worst- performing market in the near-term and China is relatively cheaper to India after the recent correction. I remain positive on banks, real estate and select capital-goods companies," he told CNBC-TV18.
The senior analyst expects RBI to cut the repo rate by 50-75 bps by CY13-end and calls for more policy action from the government to boost markets.
"Investors are confident of more policy reforms to continue investing at current levels and the success of divestment will depend on pricing by the government. I do not rule out the possibility of the 50-bps repo rate cut at the RBI policy meet on March 19 and do not expect revival in the capex cycle even if interest rates are cut," he says.
Below is the edited transcript of the analysis on CNBC-TV18
Q: Have institutional community’s tax concerns been allayed or is there still some nervousness that might impede flows in the near-term?
A: I think the concerns will continue to linger. We are trying to see if the concerns have diminished, but I do not think they have.
Q: Is there nervousness on currency?
A: The current account deficit is going to be the driver for the currency and with estimates indicating a rise, it will spook the markets a bit about what the government plans to reduce the deficit.
Q: Do you the choppiness in the global markets is over or is the situation still extremely volatile?
A: If the European Union and Bank of England cut interest rates, the easing might keep the rally going. I am still not overly convinced about this great rotation trade. If global rally continues because of liquidity, then there could be some excitement about what the Reserve Bank of India (RBI) could do.
The rally on Tuesday was probably more short covering as it does not reflect in the FII data with the domestic institutions selling more than the FIIs bought. So I do not think this momentum is going to carry itself. The markets are more likely to go down in the next few weeks.
Q: Do you think within Asia the focus on India will be lost due to macro-concerns?
A: Interest towards China is on the increase despite the dip due to the government’s taxes on property. Given the valuations in China, Brazil and Russia look more expensive than India, so there could be a rise in incremental flows which could easily be gobbled up by government and corporate issuances.
The market does hot have the momentum to move higher in the very short-term and any negative news or selloff in the global markets will increase the pressure on India. After investing USD 32 billion in India only to see continued currency weakness, has begin to worry global investors. Something is preventing the currency turning firm and I am sure it is not just the CAD.
Q: If the markets fall, which sector is the most vulnerable?
A: Our strategy remains the same with defensives in IT, consumer goods and very selective rate-sensitives.
Q: If India turns out to be an underperforming market, will some of the ratings on valuations be downgraded?
A: I do not think the Indian market is overvalued, the valuations are reasonably attractive. But the macro-perspective does not excite investors. Unless there is more policy action, I do see what the momentum could be to excite investors.
Q: What is the best strategy to approach the market this year?
A: If the markets head to 5,500 on the Nifty in the short-term, it is time to build in positions as that will ensure a return of 10-15 percent.
Q: Are there are fewer reasons this year than last year to invest in India?
A: Investors have to be really convinced that the government will continue with reforms because the Budget did not move the needle in terms of getting GDP growth moving. Though India is still not as expensive as other markets, underperforming every market in the world does start to affect valuations and relative performance. And it might cause lesser FII flows. If there is a risk-off trade, FII flows could start moving out as investors start to get impatient with growth. However, if growth is revived, there will be continued flows probably towards the second half of the year rather than the first half.
Q: Is there enough appetite in the market to soak up the offers-for-sale (OFS) from various companies or government divestment?
A: It obviously depends on the valuation of each of those companies which so far have been attractive and government divestment has been strong so far. But with FIIs losing money on a weakening currency after an infusion of USD 32 billion will lose patience in the very short-term, particularly if there is a global risk-off trade. But those risks are in the short-term.
Q: How much of a trigger will the expected 50-75 bps rate-cut by the end of the calendar year be for the market?
A: The rate-cut will probably be 25 bps and hopefully 50 bps if the RBI can see ahead of the 4.5-percent GDP growth which I am still wary about. I can understand it being in Europe or the US but I am really surprised it is so low in the last quarter. I wonder if it might be revised upwards going forward. I do not think interest rates are really going to act as a trigger.