After the midcap collapse of last week, the first signs of concerns about the Indian market has started to creep in. UR Bhat, MD of Dalton Capital Advisors said there has been strong FII flows in the month of January itself and the market strength is now largely dependent on these inflows. According to him, this might keep the Nifty afloat around 6000-6100 levels. Therefore, he is cautious on markets at current levels as valuations are not comfortable.
Bhat explained that although, there is an element of stability around the global markets like Europe, domestic institutions continue to be big sellers. He also believes that the market has a limited upside and may find resistance around 6100 to 6150. Besides, the midcap and small cap correction remains a concern, he noted.
At the moment, the market is focusing on issues like the debt ceiling, budget and the state polls and Bhat expects the government to offer some discounts on stake sales in public sector organisations. He also believes the divestment agenda of the government will not be a failure.
As far as the Reserve Bank of India’s monetary policy is concerned, Bhat is factoring in a 25 to 50 basis points rate cut for tomorrow. He also thinks that growth in the FMCG space may be much slower in 2013 when compared to the previous year. But, he is optimistic about the auto sector and feels it will give good returns ahead.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Any signs of an imminent correction after the midcap collapse of last week or do you think the market is on course to head higher into the Union Budget?
A: A correction is something that we should bargain for, especially after the problems we saw in midcaps and smallcaps over the last few days. About USD 3 billion plus has already come in from FIIs in January and it continues. There would probably be some amount of uptake in the broader market. The big call is about - how long will this continue?
There is some element of stability in Europe with most of the interest rates coming to a very moderate level. Therefore, the worries that we had of Europe breaking up and a hard landing in China or even fiscal cliff problem in US have all receded. That is the reason behind the risk on rally.
Even in India, incremental positive news about diesel deregulation, at least for the bulk users and a lot of new decisions that are probably imminent can influence the market. The market has really been re-rated, not so much on account of earnings surprises on the positive side but largely because of multiple re-ratings. We need to be cautious at these levels. The multiples are not really very attractive.
So it is only further FII flows, strong flows that can keep the market afloat and towards 6000-6100 level. But, if that stops anytime soon, then we need to be worried. The first signs of that is the midcap and the smallcap correcting over the last 10 days.
Q: How much more would you give the market from here? Is it enough done for the rally or is there more to go?
A: The fact is that even USD 3 billion plus that has come over the last three weeks has really not taken the market dramatically higher. Therefore, incremental money, larger amounts of money are required to even sustain and marginally improve the market.
But, the fact is that the domestic investors continue to be big sellers. Therefore, incrementally much larger doses of FII inflows are required to sustain the markets. That is the cause for worry.
Q: What did you attribute to that huge midcap carnage which happened last week? Any sense of what went on and whether institutional investors sold? Do you expect to see continued selling on many of these non-index names?
A: There are certainly some corporate governance issues that keep coughing up on the mid and smallcap space. That has sort of shaken the confidence of investors investing in these stocks. Also, there was some negative performance vis-à-vis expectation from some of these stocks but quite largely these are all corporate governance issues.
Pledging of shares by promoters which come to the market occasionally also led to the stocks getting hammered. These are the issues that need to be on the centre stage. That is what is bothering most large investors. Each of the stock is championed by one of the large investor. When a large investor loses confidence and gets out then there is really a carnage in the stocks.
Q: What do you expect the market to do tomorrow if the RBI delivers a 25-50 basis points rate cut?
A: The market seems to have factored in between 25-50 basis points. But, my own take is that a 25 basis point cut is certainly going to be there. All said and done, the burden of reviving investment cycle cannot completely rest on the retail savers shoulder.
With CPI inflation in double digits, the retail saver is really having a negative real interest rate. Therefore, it cannot be that you can keep on repressing him and hope that there is an investment demand revival. You can see that negative interest rates for depositors is really behind the cause for the massive demand of gold. Physical assets are the ones that would find favour with retail savers if interest rates are negative in real terms. I think one needs to address that.
It is not as if interest rates can come down with CPI in double digit figures. While there is some amount of moderation in WPI, but still it is not as if a 25 basis points will revive the investment cycle dramatically because the causes for investment cycle not being revived are probably lying elsewhere. While 25 basis points is a distinct possibility given what RBI has been saying for the last few months, there is certainly not a case for a 50 basis points cut.
If at all there needs to be some amount of moderation in interest rates, I think a CRR cut is something that also needs to be done.
Q: What kind of downside risk do you see to the market at this point given the concerns that you lined out about things having run too far, too fast. Would you say the market probably has the potential to correct about 10 percent given some disappointment in events? Or could it be an even sharper correction?
A: A 10 percent correction is quite steep. I don’t know whether it will happen that much because for example, there is brinksmanship in the debt ceiling negotiations in US and there is no agreement on that till the last moment. That can probably bring down the market quite significantly.
But otherwise, I think the first stop of course is 5950. After that, probably somewhere around 5700 I think there should be significant support. That is as far as it can go given what we can see today. But, there are always problems that are cropping up every now and then, especially the dysfunctional politics in India plus as you run up to the budget, there are concerns about populism taking centrestage. There are lots of state elections and of course central elections in 2014. I think the news flow would probably decide which way the market will go.
Plus of course, there is appetite for FIIs for continued inflows because if there is risk off trade which is possible, if there is some problem on the debt ceiling debate in the US, I think the market could correct. But as of now, everything seems to be stable. The market would be stable around 5950-6100, around that sort of range.
Q: Ex of the Budget, what kind of policy impetus can the market watch for? What do you think could be potential triggers for the market to move higher from the policy end?
A: The recasting of the state electricity board has not found favour in too many states. Therefore, if there is some sort of tweaking of that to ensure that there is wider acceptance for recasting, the finance of the state electricity board could be something that could give a trigger to infrastructure. Also, the pooling of coal and coal prices and availability of coal are the things that can really change the outlook.
These are the sort of small measures that are required for entrepreneurs to increase their confidence in trying to see whether new investments can be thought of. I think these are the things in addition to some fillip from the budget that will be required for the market to be taken up significantly from here.
Q: As we get into February, government sales will start picking up. The offer for sales for many of the largecap names like NTPC, Oil India will pick up and do you think it will get good response? Would you be keenly awaiting any of these issuances?
A: Some of them are very good issues. Quite possibly, we maybe able to get at some discount to at least the recent market price because there are such large issuances that in order to have enough appetite, the government has to offer some discount. I think offering the good ones at least for a reasonable price would stir up enough appetite.
But, the fact is that quite a lot of the potential inflows would be probably absorbed by these issuances. Therefore, the impact on the secondary market needs to be factored in. There may not therefore, be a huge upside in the secondary market because most of the money that would otherwise go into secondary market would be absorbed by these issuances. I think selling the good ones amongst them, the more popular names should not be very difficult at the right price.
Q: What’s the standout performance been from the earnings run so far for you?
A: Except a couple of surprises, it has been a sort of weak quarterly results especially among the larger sectors except for maybe energy, banking and IT. They have all been moderate performers as far as the quarterly results are concerned.
Therefore, as I said earlier, quite a lot of the performance of the markets in 2012 and even during recent times has been on account of multiple re-rating, not so much on account of earnings growth being hugely positive compared to expectations.
Q: Do you expect this to be the year though where portfolios are shuffled around consistently and quite a bit compared to the last couple of years because there have been very different performances from sectors like technology and oil and gas versus the earlier performances like FMCG?
A: Sector rotation will continue to be the theme because if the government puts its house in order and there is this policy fillip for infrastructure growth and stuff like that, I think there would be certainly some amount of sector rotation and cyclical will come back in favour. The ones that have really given very good performance in 2012 might not be the ones that will probably perform very well in 2013.
Sector rotation would be the order of the day depending on how policy initiatives take shape.
Q: You saw the HUL numbers. Do you expect the relative underperformance of the frontline FMCGs to be a protracted affair which lasts for many quarters now?
A: I think consumer demand is the only one that is holding up the economy as of now. Therefore, while it might not be as good as what we saw in 2012, some growth would certainly be there. But, the fact is that with peaking of royalty rates and stuff like that, it would be a disappointment that would probably carry this stock down for some more time to come.
Q: How are your approaching the auto space, the other consumer demand focused area because Tata Motors warning, the poor numbers from Hero MotoCorp seem to have put a cloud over the sector with Maruti being the only outperformer. Have you changed your positions around in autos?
A: There is certainly some requirement for reconsidering the sort of stocks that you want to hold. But as a sector, I think that will continue to be one of sectors that will give you potentially good returns. There is always this reshuffling between stocks and the portfolio that you need to do depending on the individual companies that are performing.
But, as a sector, that is one segment that has given us secular growth over the last several quarters. Therefore, that is something that one should back.
Q: There has been some debate about whether equities can indeed outperform fixed income as they did by a huge margin last year. What would your call be on that? Do you think equities do have the potential to outperform or is it a neck in neck race?
A: I think it is a neck in neck race because if interest rates as most people believe would get capped by something like 75 to 125 basis points in calendar 2013. I think at least fixed income funds would give a very good account for themselves whereas equities depending on how the risk on - risk off situation continues will perform because equity performances are just poised on huge FII inflows. There was a lot of monetary easing in 2012. Incremental monetary easing in 2013 is not likely to be very high.
Also there are already talks of reversal of policies in the US. Therefore, if there is a risk off trade which could come sometime in the middle of the calendar 2013, I think probably equities would find it very hard to beat the fixed income returns by a huge margin.