Market is in a lackluster mode given the lack of key triggers and is likely to remain so for some time now, says Vikas Khemani of Edelweiss Securities. Speaking to CNBC-TV18 he noted; if the US jobs data, which will be announced today, is better than expectation then overseas investors are likely to pullout of emerging markets (EMs), but this sell-off won’t be sharp.
Further he added that investors don’t expect India’s economy to a dramatic improvement soon as rupee’s fall has lowered the chances of interest rate cuts.
Market participants who are short-term traders have been investing in defensives such as consumer, pharmaceutical, non-banking financial companies (NBFC), and banking stocks. However, infra and metal packs saw some outflows, he elaborated.
He also does not expect any significant improvement from the upcoming earnings season.
Below is the edited transcript of his interview to CNBC-TV18.
Q: What is your sense in the markets now?
A: The market right now is fairly in lacklustre mode as there is a lack of trigger as far as the domestic markets are concerned. Whatever movement, we are seeing, is largely driven by international market. In the recent past, markets have recovered internationally post Fed announcement sometime ago and that is what our Indian markets are reacting to.
As far as investor mood and fundamentals are concerned, there is no clear lack of direction from hereon which will characterise the market from now till the general elections. We are not seeing any hope of significant improvement in the earnings.
Interest rates might not come down given the current situation of the rupee. If that continues, we probably might just have to put up with this kind of interest rate. So the hopes of improvement in the economy are getting postponed at least at this point in time. That will dominate the mood of the markets.
You will see intermittent rallies and corrections driven by the news flows both from the local and international markets. But markets are not likely to get any clear direction in that sense. It will have to be driven by the domestic factors. The event is out and that, probably, will happen only after general elections.
Q: For the better part of June and July, this trickle of foreign institutional investor (FII) money going out is seen. If the nonfarm payroll (NFP) numbers indeed comes in strong like the automatic data processing (ADP) data at 180,000, are we are building ourselves up for a sharp selloff on Monday or next week?
A: I do not think there could be a sharp selloff. There can always be outflow from the EMs, given the recovery happening in the US. Post the Fed statement some amount of EM outflow was seen and India got impacted with that. We almost saw close to USD 10 billion plus outflow from EM funds and part of that came to India.
If that trend continues, it could get reflected into Indian markets too. That is very difficult call to take that how much EM flows will continue to go. But if the US outlook continues to improve and post Fed announcement, the additional significant amount of flows which was coming earlier towards EMs will get some sort of halt. That is putting some worry in terms of Indian markets.
The extent of this impact on this flow which stops coming to the markets or starts going out, what could be the impact on the liquidity; that is the one big risk we are running.
It is very difficult to assess its timing and quantum. It is a big overhang. Given our currency situation, more and more currency depreciates and there’s more pressure on investors.
So that is one big risk we are sitting on. But the extent of that is difficult to guess. Having said that, I do not believe we will see massive outflows.
For example, If India had USD 15-20 billion, you will see a significant chunk going out. So, envisage that kind of big situation will not coming through. A couple of billion dollars can always come and go.
That is very difficult to predict, but that will have short-term movement and volatility in the markets given the current state of the market.
Q: That little bit of fresh money is coming into the markets. Even if it is not a significant amount, what levels is the investor currently buying fresh positions at?
A: There are two kinds of things which are recently driving it. In recent past, somewhat short-term trading money has been coming in. We saw in last couple of weeks, somewhat short positions got built through Nifty Futures and Options.
Whenever short covering happens, it is across the board. Large part of the shorts was getting built into the interest rate sensitives which were doing well. They are corrected and now the short covering is coming in those names. So, large part of the action is happening in the banking and consumer names.
Infra and metal names are pretty much out. So in these names lot of activity is there. I think, from long-term structure, money is still coming. Large part of the money is coming into defensives such as consumer, pharmaceutical, non-banking financial companies (NBFC), and banking names.
We saw ING Vysya transaction got done and structural money came into that from long-term perspective. They are very stock specific in long-term. But what is driving the market in short-term is this kind of trading position which is getting built from a short-term perspective by some of the hedge funds and competitors.
Q: Is this 5500 protected? At that level what will you buy?
A: I do not think one can put a number to right now. In the short-term, it is very much liquidity driven. Should you see a couple of billion dollars going down I do not know what level can be protected. Right now markets are not at all driven by the fundamentals frankly speaking. It is very much sentiment, news driven and liquidity driven.
In a situation like this, putting a number is very difficult and impossible. Having said that, if you are building your portfolio from a 12-18 months perspective in the current environment, IT holds good promise as US growth is coming back. Rupee is helping and stocks are not very expensive between 12-14 multiples.
IT sector holds good promise and in next 12-18 months, you can make good money there. That also is not subject to your local political uncertainty. That is where even institutional investors are also getting overweight. Other than that, given the state of market, pharmaceutical, consumer, defensives will continue to do well.
Then there are stock specifics. You can get where the good cash flows are there. Short-term uncertainties despite the political environment are not there. Those kinds of names according to me will continue to hold on.