Clients should take a cautious stance and stay invested in good quality sectors and names and selectively book profits, says Gautam Sinha Roy, VP - equity strategy & product, Motilal Oswal Securities Ltd. Talking to CNBC-TV18, he says short-term investors who want to trade the rally can look at high-beta sectors, like realty, metals and infra. He says expectations of a rate cut seem to be robust as can be seen through the reduction in yields.
Here is the edited transcript of his interview with CNBC-TV18
Q: The market is pretty close to its all time high now. What should be the portfolio stance because this market has been very narrow so far? Do you expect it to maybe get a bit broader now and do you expect sectors like infrastructure to extend the gains that they have seen over the last couple of days?
A: Either one has to be very clear about whether one sticks to quality names even at this juncture because that has been a stance throughout this year, to good sectors and sectors where there are fundamental drivers or triggers in place in the near-term as well as the long-term. If one wants to trade this rally very aggressively, then one can look at high beta names, realty and metals being the prime two examples.
This is one stock rally which has not seen participation from the high beta sectors yet. So, that is a call one has to take. We are advising clients to be more on the cautious side. If you are already invested in good quality sectors and names to stay invested in them and selectively book profits because finding good stock ideas in quality names would be difficult at this juncture.
However, if you want to have a very short-term kind of an outlook and trade the rally, then one can look at high-beta sectors, realty and metals would be the prime examples there and infra too.
Q: It has been quite a strong rally in the yields as well as the markets. What do you think in terms of the macros is now factored into the markets and what can we expect from the June policy, considering what we have seen on the wholesale price index (WPI) inflation figures?
A: Market is taking note of the sharp reduction in the WPI trend and overall reduction in commodity prices, especially crude and gold, which will definitely help India going forward both on the current account deficit front as well as the fiscal deficit front and will also bring down inflation.
So, expectations of a rate cut seem to be robust as can be seen through the reduction in yields. We are seeing that that is reflecting in the PSU banks trending upwards too. So, after hitting fresh highs in January, PSU banks have been weak over the last three odd months.
Recently over the last couple of days we have seen some pickup of steam in those banks and that is largely being driven by expectations of rate cut as well as overall expectations and improvement in the non performing assets (NPA) cycle.
We have seen a couple of examples where NPA has improved, Punjab National Bank (PNB) and Union Bank being the prime two examples there, State bank of India (SBI) results are still awaited so there is expectation that NPA cycle would have bottomed out as well as strong reduction in yields which will help these banks book treasury income, very strong treasury profits. So, these are two factors which should be positive for PSU banks. So, that is one space that one can watch out for in terms of more positive action.
Q: How do you expect the fall in gold prices to be in terms of how Indian demand plays out? The reason I ask is one of the key constituents of the trade deficit data for the month of April was the gold prices spiking and now we have gold coming down to around Rs 25,000. Is it a positive or do you think that there will be excessive demand hence it will possibly be negated and we will still be working with a high trade deficit scenario?
A: One of the plausible scenarios which explains this high gold imports last month is the fact that very high gold prices for the last one and half years or so would have created a lot of latent demand in the system and the other part is there are expectations that the government might clamp down on gold importing in a substantial manner.
So both these factors together could have resulted in people taking advantage of the window in which sudden collapse in gold prices opened up to import whatever gold they needed to cover that latent demand that is there in the system.
So that is a plausible explanation, so we would not be very worried about a one-month figure there. Let us see if this is a trend and it is very unlikely that this will sustain. It will revert back to more normalised level which used to be half of the import levels that we saw last month. We should not worry too much about very high gold imports. In terms of demand pick up in the local economy for the jewellers and all that should definitely come in because lower prices would mean more affordability.
So volume-wise we should see more gold pick up happening, but net-net that might not impact in value terms what kind of gold has been sold by the jewellers. So overall that should be an utilising factor, volume versus prices. Definitely prices coming down of gold and crude if they sustain are definitely positive from the overall macro perspective for India. That holds true irrespective of anything else.
Q: What will you do with FMCG stocks, in particular Hindustan Unilever (HUL) where there is open offer at Rs 600?
A: For long-term holders of HUL this is a good opportunity to take the money off the table. However, given that the company itself and many other MNCs too are reposing so much faith including Glaxo which we are just discussing. The parents are reposing so much faith and long-term growth prospects of the Indian consumer segment that does give you a hint that there is money to be made long-term in this sector. So, if you want to create a long-term portfolio Indian consumer is definitely a very good story there and you should remain invested and which stock better than the HUL to be invested in the Indian consumer. So, that would be the natural argument that I will place here.