Indian equity indices started the Budget week on a dull note, with both major indices recording losses for the first day of trade. According to UR Bhat, managing director of Dalton Captial Advisors, this weakness in trade will continue going forward.
In an interview to CNBC-TV18, Bhat explained that the market could trend lower for the next few weeks mainly due to global concerns. With the Eurozone crisis rearing its head again, and a possible pullback of the US Federal Reserve's quantitative easing program, investors are opting to pull out their money and stay on the sidelines. "The market could correct sharply in case of a risk-off trade on EU issues," he added.
However, Bhat believes there is no reduction in the foreign institutional inflows (FIIs) into India.
Speaking about the upcoming Union Budget, Bhat says that the market is likely to experience a bounce back in case the Budget surprises positively. “If the Budget is good and if domestic investors regain some confidence and they stop selling, I think the flows from FIIs will ensure that the market would probably trend towards about 6000,” he said. On the other hand, if the Budget is a non-event, Bhat believes the Nifty will consolidate between 5,700-5,900.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: Rough cues globally over the last couple of days. Do you think we are setting into a global correction?
A: In the short term, maybe, because I think the position in the US on the debt ceiling negotiation between the Republicans and Democrats is sort of hardening. News from Europe continues to be quite bad, with the Italian election results causing more confusion and the downgrading of UK. All this seem to suggest that there are volatile times ahead at least for the next few weeks.
But at the same time, it is not as if the quantitative easing stance that developed markets have will be withdrawn anytime soon. So money would probably keep coming, but there would certainly be some trepidation because of all the events in the US, UK and the rest of Europe.
Q: Do you think you can get away with 5800 on the Nifty given a reasonably okay Budget, or are the port ends pointing towards a much deeper downside in the near term?
A: With a good Budget I think the market can really bounce back because it is really looking for some sort of a relief rally. If the Budget can provide that, I think that would be quite a jump; 5800 could be history if the Budget is very good.
But if not, I think the market will trundle along around 5800, mainly because the international situation is not very conducive for a huge rally. So I think it will be either around 5800, plus or minus around 100 points, or if it is a very good Budget, then I think it could probably be somewhere near 6000 levels.
Q: Till January, most institutional investors had an overweight position going on in India. If there is global risk aversion, what would they do differently even if the Budget is positive? Do you think incremental cash would come into the market courtesy the Budget?
A: If the Budget is very growth oriented and pro-market, I think incremental flows could come in. But even otherwise, we have almost got USD 8.5-9 billion from January. So the force of FII flows has not really weakened in anyway. It is just that the market has not really done well despite about USD 4-4.5 billion coming month to date in February. We still have three-four percent correction in the market. So I think it is domestic factors that are really bringing down sentiment.
But going forward, things might look better if the Budget is good. Also, if there is some solution to the debt ceiling issue in the US and some solution to the Italian government formation, I think things could look better.
Q: What could the potential pull back be because we have lost quite a bit of ground and it has been a slow grinding kind of process for the market over the last couple of weeks?
A: If the Budget is good and if domestic investors regain some confidence and they stop selling, I think the flows from FIIs will ensure that the market would probably trend towards about 6000. That is quite a possibility depending on how the Budget influences the thinking of the domestic investors. The biggest problem has been domestic investors have been selling big time for the last almost a year now. If in some way the Budget is able to stop that, I think the market can stabilise around slightly higher levels.
Q: Usually the Budget is not such big game changer, so do you think it is possible or would it be hoping for too much?
A: Nothing less is expected as of now because I think there is a doom situation being portrayed. Therefore, if the Budget can change sentiment, which I think P Chidambaram can pull off, that is going to be a relief.
But otherwise, it will trundle along the 5800 lines. In the short term we don’t have anything great coming out of the international markets, but I think if the problems in the US and Europe are solved, at least to some extent, the market can sort of inch upwards probably after a month or so. But the Budget itself may become a non event come next week.
Q: How would you approach telecom now? There was very poor response to the new auction. Is that a good thing for the incumbents that new players are not bidding very aggressively for new spectrum?
A: I think that is certainly good for the new incumbents, the dominant incumbents, because there probably would be less competition. Even though they don’t have great pricing power now, at least disruptive competition would probably not be there. So therefore I think it is good for the incumbents.
Q: At this point the market is not going in with any big sectoral expectations from the Budget. Anyone do you think might come out a clear winner from the process?
A: One hopes that they will do something for infrastructure because that is the one that can really change sentiment as we go towards the election in 2014. I am sure they need to address that issue about infrastructure, land allocation, resources allocation and also the issue about State Electricity Boards (SEB) being recast as far as their finances are concerned and power sector. These are the sectors where people have the highest expectations from the Budget, and if they deliver on that things might look up and the market itself might actually get revived a bit.
Q: In the current context, how do you think they will read any expansion of the divestment program and how do you think they will approach stocks like Steel Authority of India (SAIL), Rashtriya Chemicals and Fertilizers (RCF) which are due for hitting the market soon?
A: Divestment candidates are probably not the ones which would find great interest in the secondary markets at least for now. But if that is coupled with huge revival of the secondary market, like if something like cutting down short-term capital gain tax happens, then I think there might be a revival in the secondary market. That is probably the only situation under which the government can get away with aggressive divestment. But otherwise the appetite for some of the stocks that you mentioned may not be all that great unless they are offered at a reasonable and rather a steep discount to the current market prices.
Q: How would you approach the midcaps space now? The price destruction has been very immense, so are you looking at them with a sense of opportunity or do you think this kind of price destruction will still continue for a bit longer?
A: The way the price destruction has happened on account of corporate governance issues, I think it is best to keep off. Where, on the other hand, some of the destruction has happened on account of specific factors which are related to pledging of stocks and issues like that, where there is a hope that there would be some revival and where the core business fundamentals continue to be strong, there might be a case at some stage. When there is further correction possibly, there might be a case for buying it. But where there are corporate governance issues, I think it is best to keep off such companies. In fact, the bulk of the midcap and smallcap companies which have been hammered have been on account of corporate governance issues. I think it is best to stay off these companies.
Q: Do you think the potential rally that you are speaking about post-Budget will be predicated more on issues like attracting more domestic investors to the equity space or do you think it is a fix of the Indian macro problem, which if attempted may actually lead to a much more durable rally?
A: Reviving the investment cycle and the sentiment towards new investment is going to be a sustainable only post-Budget. In the short-term quick fixes also help. For example, there is some talk about a new voluntary disclosure scheme, there is some talk about short-term capital gains being tweaked downward and that can certainly revive sentiment a bit.
But if there is some magic wand that the Finance Minister has which can change the outlook towards investment as far as entrepreneurs are concerned, I think that can really be a harbinger of a sustainable move upwards as far as the market is concerned.
Q: What is your sense of how the domestic crowd is approaching the event?
A: I think the domestic sentiment has been quite bad for almost a year now and it requires quite some effort from the Finance Minister in terms of the provisions that he is going to bring forth in the Budget for this sentiment to change.
I was just reading the other day that LIC has been a very big seller in order to create enough space for public sector divestment. That is something that is really a big dampener for the market, because they have been consistent sellers and even mutual funds have not been attracting big amounts of equity money.
So I think this is something that can change only with the Budget reviving the confidence in the economy. Otherwise foreign investors have been big backers of the Indian economy and the Indian market and I hope that would continue. It is the domestic investor whose attitude towards the market has to change so that the market can really give a good account of itself.
Q: If it is a modestly positive Budget but not very path breaking, what probability would you set to the prospect of the Nifty breaking 5800 and going down all the way to 5500 kind of levels?
A: That could happen if the Budget is not up to the investors’ expectations, up to the market expectations and also if there is further problem as far as debt ceiling negotiations in US are concerned. Also there is further confusion in Italy with no backing coming in from Germany in anyway and further problems in Europe can bring down the market to that level if there is a huge risk-off trade in the international markets.
Q: Do you think there will be more good news for the oil and gas pocket?
A: In oil and gas, problems have been relatively solved largely because of this creeping increase in diesel prices. If that continues without any let down for the next several months, I think the problem will be solved in 1-1.5 years from now. If at all the market is in a mood to accept even slightly steeper prices, I think the problem about diesel prices could be solved over the next few months. If that is solved, I think a significant portion of subsidy problems are solved which would leave the government some space left for the social spending if it is required. That too is better directed through the new direct cash transfer mechanism. If that happens, I think the market will probably have a sigh of relief and market might draw some comfort from that.