Madhusudhan Kela of Reliance Capital explains to CNBC-TV18 that there is widespread consensus that 2013 will be a great year for the market and the economy on a culmination of various positive events and factors. However, he advises investors not to be overly gung-ho on equities and take a call after the announcement of the Budget begins to take effect.
Below is an edited transcript of the analysis on CNBC-TV18
Q: The market is knocking on the doors of 6,000. Is there a lot of upside in 2013?
A: The next two months till the announcement of the Budget, I expect the market will be broadly positive. The markets are up 30 percent on the back of only price-to-earnings (PE) multiple expansion virtually without any earning growth last year. The risk-reward is not as much in favour as it was six months ago.
The momentum is by the side and the market will not peak out in an environment like this where people are still cautious. So I would not be surprised if the market makes a new high before the Budget because there is culmination of - liquidity foreign flows, domestic investors wishing to participate and the roar of policymaking - before the Budget.
So I would not be surprised if the market hits a new high. But in this environment for long-term investors, who have been advocating equity. do not go to the other extreme and put everything you have in equity.
Q: So what's your prognosis- is the market going to move towards that new high after which it spends an extended period of time just trying to justify those levels and gain some kind of base or do you think its going to be an inverted-V kind of performance with all the good news in the first two months and then the market starts to come off?
A: It is too early to make a judgment. But I still feel that till the Budget there will be a culmination of a lot of positive factors. But after the Budget I would evaluate the impact of the Budget before I take a call.
Another favourable factor is that the global economic environment has been extremely calm in the last six-to-eight months. Investors seem to have forgotten the problems in Europe and America.
There is a widespread consensus among major domestic and foreign fund houses that 2013 is going to be extremely good. However, this does not mean investors can be overly bullish on the markets. The first quarter might be very positive but I don't rule out the market giving up 10-15 percent of its gains in the next quarter.
Q: There is another point of view which suggests that the first half will actually be difficult for global markets and the Indian market may struggle in that context. Do you see that as a likely outcome or do you think, with the way the market is shaping up, the market is going to touch that new high in the early part of the year and then go sideways?
A: The first quarter is when there will be maximum action in the markets. There is no doubt that the macro-economic environment will be better than what it was last year, but it remains to be seen, from a stock market point of view, how much of that has been priced in.
Q: What do you expect to see in terms of retail participation? Do you see retail participation coming in a big way once the market touches the 6000-6100 levels and will there be any kind of panic-buying this time?
A: I clearly see that coming. If retail participants wish to invest in equities, they have to be systematic and if they are already invested, there is no need to go whole-hog and invest all the funds at their disposal.
Retail investors need to be prepared for a dip because the longer-term Indian fundamentals are still intact. But after making 40-50 percent return, retail investors' expectations have to be muted.
Q: Dip of what magnitude? Will it be sub-5800 during the course of the first three-to-six months?
A: For the first six months, I would not rule out that. Again it is very difficult to pinpoint a level but if the market touches 6300-6400 before the Budget, the market can make a new high and go to 5500 by June, July or August. That is very much possible.
Q: How do you read the kind of flows we pulled last year because really that’s been the most overwhelming factor for the market?
A: The FII inflows have been roughly USD 25 billion but a lot of it has not been reflected in the market. Close to Rs 65, 000 crore of these flows has gone to buy out long-term strategic stakes. Also for the whole of last year, the global environment was so bad that India was a destination by default.
So there should be little expectation of a repeat of inflows of this magnitude. I am also worried on the Rs 10-15,000 crore of redemption in the mutual fund and insurance in the last six months. So you see, domestic institutions are selling everyday.
The market's sole support rests on FII inflows and this poses great risk, It is not possible to rule out the adverse impact of reduced inflows on the market. In 2011, the market fell 20-25 percent on outflows of just USD 1 billion.
Q: You sound cautious. Is politics playing on your mind? Are you worried about the second half of the year and the impact of the elections on the run up for the market?
A: It is a combination of all the factors. The market is coming off from the 40-50 percent return in the last one year. Volatility across the world has collapsed in all asset classes and the VIX Index is at a multi-year low. An economic environment with volatility being so compressed cannot exist forever. I expect the markets to be far more volatile in 2013 and I’m on a wait-and-watch mode if the markets after offering a return of 50 percent returns posts a downside in volatility.
Thirdly, all the gains in the last one year have come only on account of PE multiple expansion and a lot of it is yet to reflect on the real fundamentals. So all these factors are making me circumspect of going overboard and telling investors who have missed out on equities, that this is the time to be fully invested.
Q: Smart money has been moving to cyclicals over the last month or so and trimming positions in defensives or FMCG, pharmaceuticals. Do you see earnings coming through over the next couple of quarters to justify this kind of optimism in the cyclical counters, particularly?
A: Partially, yes. Real estate stocks have done very well in the last three-to-six months so I expect lot of the real estate companies to do very well fundamentally, at least the companies that we are tracking and have visibility. So, some sectors will come through. But I don’t think construction companies can be rebound because lot of balance-sheets of companies in the construction sector are beyond repair.
Even in capex companies, the announcement of capex has reached the lowest levels in the last 10 years and is down 75 percent. Though it will be difficult for all these capex companies to do really, there will be select pockets of cyclical stocks that will perform well.
The segment on which I am really bullish is the PSUs slated for disinvestment. Investors who bought National Mineral Development Corporation (NMDC) at Rs 150 really got a fantastic deal and government has done a great job because the only way to really attract more investors is to ensure that people make money on whatever you sell.
There has been a 35-40 percent growth in the book-value of National Thermal Power Corporation (NTPC) in the last four-to five years and a growth of another 20 percent isv expected over the next two years. The stock has been down 45 percent in the last five years. So if you are going to get a company which is generating 40,000 MW of power at 60 percent discount to the book value prevailing five years ago at prices 45 percent lower than what it was trading at five years ago, I’ll be very optimistic.
Q: The NMDC issue was a double-barrelled offer -the valuation was low and the government offered a very attractive price. Is that your expectation in NTPC or could the government be saying – 'Look at this, I sold it at Rs 200, the stock is now at Rs 156. At this valuation can I still give a 10 percent discount or would I be selling family silver too cheap'?
A: A lot of these opportunities have to be looked in the context of longer period of the underperformance.
Q: What about public sector banks? How do you gauge the performance of public sector banks this year?
A: If the market as a whole does well, public sector banks will do well in the market. But I think from hereon they will be moving with the market and not significantly outperform, because there has been a lot of outperformance from public sector banks in the last three-to-four months. So if the market makes a new high, another 5-to-10 percent, public sector banks will move in line with the market.
Q: You started off as a big believer in midcaps. What do you make of the moves in media and gems and jewellery?
A: I think both are selectively positive. There has been a lot of discussion on media. I will once again reiterate that the Digitisation Bill proved to be a game-changer for the sector and I think people who want to invest for the medium- to long-term should look at any meaningful dip if to invest in media.
Regarding the jewellery sector, I think there are a lot of companies planning who are expand into the retail segment and those are the real good franchises to back. But one will have to be very selective because there will be a few winners in this sector for sure.
Q: Do you think we have started on a clean trend in the market or could this be a year of consolidation?
A: I am not as optimistic about 2013 as I was about 2012. In 2012, there were a slew of stocks where I wished to invest in and I struggled to allocate capital. Today, I find it tough to list 20-30 companies where I can just go and blindly invest.
Q: Do you think equities will beat fixed income this year?
A: I am not sure. But I would say that even in the first half, the pre-Budget and global environment still looks benign. Retail, long-term investors who have missed out on s rally, should not lose patience and go whole-hog and invest all their savings.
Q: Where does all this leave the mutual fund fraternity?
A: Sadly in the last two-to-three years there has been very little participation in equities by retail investors. This under ownership of equities cannot sustain at these levels.
Q: So what would you tell them in terms of clear strategy that you start SIPs but when you see 8-10 percent kind of draw down, stop up more?
A: Yes, that's what I am saying. If you see a correction, keep the longer-term fundamentals in India. Equities as an asset class over a five-year period looks good. I don’t like this fall in volatility in the world market. The VIX Index, at 13, is the lowest level since 1900. People have become too complacent.