The market has welcomed the new Reserve Bank governor Raghuram Rajan and his reform measures by seeing a massive rally on Thursday. However, this rally is shortlived, believes Sangeeta Purushottam, founder and managing partner, Cogito Advisors.
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Purushottam explains that market will find it tough to move up "beyond 5700-5800 levels, because valuations are no longer compelling." She said the reform measures taken by the RBI and the government will take time to fructify. "One cannot define this market in a secular uptrend, there will be rallies and there will be corrective phases, so it is more like a base building phase that I see over the next year-and-half.
Purushottam expects public sector banks to perform well and recommends buying State Bank of India.
Below is the edited transcript of Purushottam’s interview to CNBC-TV18.
Q: How long can this bonhomie generated by Raghuram Rajan last you think? You think it is enough to take the index beyond this range of 5255 that it has been lingering or do you think it is going to remain in that range?
A: I think we could overshoot that range a little bit but it is a little difficult to imagine the market going too much beyond say 5700-5800 levels because the valuations no longer are compelling.
While we are hearing a lot of positive steps taking place from both the government as well as the RBI, the whole recovery is a process that will take time. It isn’t as if it is a smooth road. There will be turbulence along the way.
Hence, while the direction is right, the path could be reasonably longer than what the current rally seems to suggest. And there are external headwinds which can come in from time to time. So, we need to bear that in mind. One cannot define this market in a secular uptrend, there will be rallies and there will be corrective phases, so it is more like a base building phase that I see over the next year and half.
Q: Is there any bank that you would buy today?
A: One could get into some of the beaten down names, like a PSU bank, may be State Bank of India (SBI) makes sense because it is the leader among the banks. It is at a fairly beaten down valuation too, but at this level, it would be more of a trade right now or a very long-term buy.
Buy it if you are ok the valuations and don’t care what happens in the near-term and intend on holding it for either a two-three year period or get 10 percent more in this rally and I get out. So, one needs to choose which of the two approaches one really wants to take.
Q: The lows of last week were about 5120 or so on the Nifty. Do you think that at least for now we have put a floor at that 5150-5200 level on the index?
A: It is difficult to say where the final floor is. If one goes by the trading range of the market in terms of P/Es, then market tends to bottom-out at about 11.5-12 times forward P/E. That gives a range of about 4800-5000 or thereabouts. So, that is one way of looking at what the worst case scenario could end up being should the turbulence in the market intensify. Currently, we would be trading closer to about 14.5 times. So that scope of market move just getting derated to the lower end remains in a period of adjustment which is essentially what we are really going through.
Q: Will you buy the metals now?
A: I am not sure. I think they have run up a fair amount so getting in at this level after a rally from lower levels of about 25-30 percent is fraught with some level of risk. If one has to get into metals, just wait for a certain weakness to come back and then get in rather than at these levels.
Q: Are you asking you clients to buy anything at all?
A: Not at this point. We are basically asking people to really wait and watch and really look for opportune times in terms of stress in the market to really get in, because at a time like this, one is not going to see very strong earnings growth for the market as a whole.
Some segments will give growth but a lot of them are priced in. So, we are saying that one should just wait for a while and get in where one gets a lot more comfort on the valuations because then you have the ability to ride it out and not care too much whether the return to earnings growth takes a few months longer or not. So, that is really the approach we are taking.