It was a weak session on the Dalal Street today. The Nifty slipped half a percent to around 5,850. The Sensex closed down 126 points at 19,229.
In an interview to CNBC-TV18, Girish Nadkarni, executive director and head-equity capital markets, Avendus Capital says the market is just pausing now. "The market had risen sharply. So, it is taking its breath now. We should see good market for the next three to four months, starting from January 2013 onwards. The market is just pausing now," he elaborates.
He further says, there is still a strong expectation that the interest rates are likely to come off, maybe in the next RBI policy. "With some control over inflation, we should see a decline interest rate scenario, if not in January, certainly thereafter," he adds.
He is seeing a good year ahead for equities. For 2013, he is positive on cyclicals, interest sensitives, autos, public sector banks, and cement. "Barring consumers, capital goods and commodities, I think the rest of the sectors should do well," he asserts.
Below is the edited transcript of his interview on CNBC-TV18.
Q: How are you reading the market now?
A: The market is trying to consolidate at the 5,900 level. It has not been able to break past that level for sometime. However, the market had risen sharply. So, it is taking its breath now. We should see good market for the next three to four months, starting from January 2013 onwards. The market is just pausing now.
Q: If you are positive on the market, coming into the next three-four months, what would be the fundamental reason that you would attribute to an upside potential from these levels?
A: Reforms or fiscal steps, which were necessary, the government seems to be taking most of those steps. Divestment is happening. We are expecting to see banking reforms. We have seen FDI in retail. We have seen efforts being made to control expenditure, to increase taxes. So, the efforts from the government, although very quiet, are definitely there.
There is still a strong expectation that the interest rates are likely to come off, maybe in the next RBI policy. With some control over inflation, we should see a decline interest rate scenario, if not in January, certainly thereafter. We feel very strongly about the fact that if interest rates begin coming down then you will see industrial activity pick up further. That should lead to a strong recovery in the market.
Also, we should see a shift of traditional domestic savings from the banking fixed deposits and debt instruments towards equity because the returns from mutual funds are becoming positive. I think there will be a shift towards equity. So, on the performance side, you will see companies performing better. You will have more money for equities. So, all in all, we are seeing a good year ahead for equities.
Q: You spoke about a possibility of a rate cut in the next RBI policy. Are you expecting some action next week from the RBI?
A: The RBI could surprise positively on this count much ahead of the next policy as well. Having said that, IIP numbers being strong and inflation not having come down very sharply, the RBI might just wait for the next round of things. But if it happens sooner than that, the market will be certainly positively surprised. That can spur the market right away.
Q: How have you read the Parliament session up till now? Do you have any expectations from it?
A: One thing is certain, from what we have seen in the last few weeks is that, crucial policy reforms will not be as easy for government going forward, if we see an era of coalition government. That is a given. Therefore, from an investor perspective, to play for something which is critically dependent on reforms, may not be the best strategy to follow. So, there will be intense lobbying by different political parties on reforms and policy actions that the government would want to take.
Q: Where do you see the downside being capped for the market in the near-term or medium-term?
A: As far as the market is concerned, there are two jokers in the pack. One, we are seeing an increasingly difficult balance of trade situation. We are seeing exports not growing and imports being sticky because oil continues to remain reasonably firm. If that happens and interest rates do not come down because inflation continues to remain sticky then you will see the rupee sliding down quite sharply.
People have begun talking about the rupee going to 60, although that doesn’t seem to be likely immediately based on the flows that are coming in and expected flows. However, that could spur some downside into the equity market.
The other is the inflation. If the inflation continues to remain sticky and doesn’t come down then you may not see interest rates come down. So, those are the two variables really.
Q: How do you expect the macro economic situation to pan out? I am talking about the fiscal deficit situation and maybe even the current account deficit situation. Do you think that at some point the market will start factoring in the fact that maybe it might not be as an optimistic a situation by the end of FY13?
A: As far as the fiscal deficit is concerned, everybody is aware that the fiscal deficit situation has been difficult. Having said that, there have been positive moves made by the finance ministry, in terms of kick starting the divestment agenda, trying to bring in more FDI, trying to ensure that the economy gets into momentum. So, all the necessary steps, which are expected, the government is trying its level best to do.
If the economy gets into a little bit of momentum, you will also see corporate taxes kicking in additionally. So, my sense is fiscal deficit may just about be kept under control. What is not under the control of the government is the oil prices. That makes imports very sticky and the growth in the world markets. It causes a decline in the demand for Indian exports. Those two things are beyond the control of the government.
Current account balance can continue to be negative. We hope to see that if the fiscal deficit comes under control and you see interest rates coming down then hopefully FDI and FII money coming into the country will ensure that we can carry on strongly, despite a weak current account balances.
Q: What is your opinion with regards to primary market? What would your thoughts be on the primary market as a whole? What about Bharti Infra?
A: The primary markets have been very buoyant. We have seen three issues that have done very well as far as subscriptions are concerned. By and large, the primary market in 2012, investors have made money on issuances that have happened this year, although they have been much fewer.
We have seen institutional investors coming back and investing in the capital markets, primary markets. That’s pretty heartening. There is the divestment programme of the government. That will certainly help the divestment programme. It will also enable industry, which is hungry for equity capital, right now, for their next level of growth. That is positive. All the four issuances including NMDC have done pretty well in terms of investor interest. I think we see that sustaining, going forward, on the back of strong secondary market.
Q: If your call on the market is positive, sectorally, how would you play it? Would it largely be your banks or your cyclicals, which will be doing well or do you think that FMCG and pharma can continue with its good run despite the valuations?
A: We are looking at an all-round growth in the market next year. Capital goods may take some time to recover on the back of a strong order flow and improvement in the capital commitments made by industrialist. Except capital goods and some commodity sectors like steel, iron ore and other minerals, I think the rest of the industries should be quite strong.
Cyclicals or interest sensitives particularly should do well for next year. I think autos, public sector banks, and cement look pretty good. Consumers as a sector, the demand will continue to be strong next year. The valuations are concerning. So, as we get into the next year, growth comes into consumer and the valuations become a little less expensive. That’s when money will also begin flowing into consumers. So, probably consumer may just about stay flat. But barring consumers, capital goods and commodities, I think the rest of the sectors should do well.