Alok Sama, president and founder, Baer Cap Partners opines that the market is in a consolidation phase with increased global liquidity and risk-appetite driving the current rally.
Sama adds that the tail risks of the EU crisis and the US fiscal cliff have receded and all of industry is keenly observing the execution of recently announced reforms.
Liquidity is stable, there is little expectation of a meltdown in near-term with money flowing back into India and the Budget unlikely to surprise, says Sama.
Below is the edited transcript of the analysis on CNBC-TV18
Q: What is your estimate of the market over the last three-to-four weeks- do you think it is consolidating or is the market bracing for a deeper fall?
A: My view is that the market is in a phase of consolidation. To explain my view, let me unravel the factors that have come together to drive the rally in the market since September.
First obviously, is the government’s response to pressure from potential foreign agency downgrades and dull investor and the international community reaction by announcing incremental initiatives such as the relaxation in the rules for overseas investment in retail, insurance and general anti-avoidance rule (GAAR).
Second and more importantly, increased global liquidity and risk appetite have emerged as key drivers of the rally. This is clearly evinced by the USD 24 billion of inflows in 2012 and in the last few weeks in January, I think the inflows touched USD 4.5 billion which may well be the single highest month in terms of FII inflows. Perversely, domestic institutions were sellers to the tune of USD 3.5 billion which is interesting. So this is a rally that is being driven by global liquidity and risk appetite.
Thirdly, the tail-risks have disappeared in the international markets. The risk of an implosion in Europe has receded along fears with respect to the fiscal cliff in the US. So that has been a big positive. Central banks worldwide continue to keep the spigots open in terms of liquidity. The Fed is buying at the rate close to USD 50 billion a year and the Bank of Japan (BoJ) has joined the fray in no uncertain terms on targeting inflation. So, the yen-carry trade is back in fashion. In the UK, the new governor at the Bank of England (BoE) is committed to the idea of targeting a nominal gross domestic product (GDP).
I query whether the government of India and the finance ministry will have the appetite to follow through aggressively on some of the reforms that they have announced. With only about a year away from elections, the pressures with respect to inflows have gone away and there will perhaps be a tendency to be somewhat sanguine about what needs to be done. So, the potential for incremental initiatives in India has started to reduce.
So the combined interaction and effect of these factors have, in my estimate, induced a phase of consolidation in the market.
Q: How would you map the first half of the year for the market? Do you think liquidity will keep it from performing or set off a phase of market-correction?
A: It is anybody's guess. It is inherently unpredictable driven by global liquidity and risk appetite with a modest correction internationally and a modest correction in India. I think that there is a long way to go. I am not expecting an outright meltdown because the liquidity is here to stay and globally, equities are under-owned and emerging markets buying growth seem to be in vogue. So I do not suggest there is potential for any kind of dramatic collapse. But I think the aggressive run is behind us and the market is in a period of consolidation.
Q: Do you see a switch in flows into emerging markets because some commodity-heavy emerging markets like Brazil and China are now beginning to pull more cash?
A: China has emerged from a phase of period of dramatic underperformance in the stock market. So in the short-term it has started to catch up and has caught up fairly dramatically. I mean the rally in market is just a gaffe. Towards the beginning of December 2012, analysts announced that China was one of their top picks among EMs.
Global liquidity with a carry trade has started to home-in on EMs, concentrating more on China more than India. But India has been a major beneficiary too. In the light of valuations and hurdles that India needs to overcome, I would tend to be more cautious on India and more bullish on some of the other EMs. But who knows? These trends are inherently unpredictable in the short-term.
Q: The big event for India is that in three weeks the Union Budget is scheduled to be presented which, like it or not, is an important event in the market's calendar. What are your expectations and how do you think the market will behave in the run-up to the Budget?
A: The list of expectations from the Budget is a very long list. But the political reality has to be acknowledged. I think the urgency has perhaps receded with the aggressive return of inflows. With the elections just a year away, I sense the Budget will offer very few surprises.
But anything that suggests a slowdown in growth would be a fairly dramatic setback for the market. I think in an economic environment where investors are beginning to be increasingly cautious, that could be a big negative for the market. So I am not expecting anything dramatic out of the Budget. No major surprises one way or another.