Vibhav Kapoor, IL&FS, says that the Nifty may touch 6100-6300 by February if the US fiscal cliff issue is resolved. He also says that all global markets will be adversely affected if fiscal issue does not end on a positive note. The future market movement is solely dependent on fiscal cliff issue.
Below is the edited transcript of his interview to CNBC-TV18.
Q: Does it look like there could be a year-end correction or you would not bet on that right now?
A: The US fiscal cliff is one single factor which will decide the market movement not only for the year end but for next few months. It will also decide if the uptrend will continue or the market will move into corrective mode.
Q: How badly would India be affected by both the uncertainty and the outcome? Up until now performances have been disparate across markets despite this fiscal cliff issue.
A: If the fiscal cliff issue actually boils over completely and turns completely negative then it will have an adverse impact on all global markets including India. India may see little impact because probably commodity and oil prices will come down, but the sentiment will turn sour across the world because at this current juncture when the global economy is just coming out of a very slow growth, if the US sees a figure of minus 2 percent for the next six-nine months, then it will have a negative impact on all markets.
Q: What probability would you set for the Nifty to get back to 6300 top buy between now and the Union Budget?
A: Our target is 6100-6300 by around February. The chances still look very bright, but it is subject to development in the US. If the US economy sees negative growth rate due to fiscal cliff then the chances of 6100-6300 would diminish considerably.
Q: Where would it set downside risk at for the market?
A: Right now we are looking at 5700-5750. One needs to reassess their position if the outcome turns negative. It is too early to comment about the outcome.
Q: Do you think is there any local development which will be significant over the next 20 days or do you think the local news flow is over for now?
A: I think the local news flow is over. Result seasons in mid-January and next RBI policy will be the event that needs to be closely watched.
Q: What do you reckon? How do you think some of these high-beta spaces like real estate and infrastructure may move over the next couple of weeks?
A: The infrastructure space and the real estate space have not really done all that well, they have underperformed, although they have gone up in the last rally. So I think there is still sometime for them. For a lot of these sectors, it depends on how interest rates move in the domestic economy going forward and with the RBI not cutting rates in December; I think that has got postponed a little bit.
These sectors will only start to really perform well when there are clear indications that the interest rate cycle is really going to come down by at least a 100 basis points.
Q: Do you see the mood turning around even in the event of a global correction? The mood has been quite good. A lot of people still have not invested quite substantially. Do you think any pullback because of global factors might be used to buy or do you think sentiment is still fickle, and it could all start turning around?
A: The sentiment is pretty good, there is no doubt about that, but the US event is a very major event, which can have a major impact on the markets for the next 3-6 months. If that turns out to be completely negative, no solution is found then the global sentiment is definitely going to become much worse, which would mean if nothing else, you could have a long and deep correction in the market.
Q: How active do you think policy movement will be between now and the Budget session? Do you expect to see a whole lot coming through in terms of policy changes?
A: The big bang policy changes probably have already been announced. I would not expect much to happen before the budget. The government would now concentrate on seeing that the fiscal deficit target of 5.3 percent is met. Also seeing that the Investment Policy Board is set up and that on the ground there is movement in clearance of projects. So they will look at these practical things rather than big bang announcements.
Q: How is your portfolio positioned for 2013 now? Have you made any significant changes in the last one month or so?
A: Yes, over the last two months, we have been gradually shifting towards the cyclicals and rate sensitives, and reducing our exposure to defensives.
Q: Do you see any resolution to the problem on the currency front? The market is doing what it is doing, while the rupee has been sliding and it is back to 55 plus this morning?
A: People were talking about 48 and 47 but we have always been of the view that as long as you have a current account deficit, which is in the region of four percent and you have an inflation rate differential of 5-6 percent, the rupee is very unlikely to appreciate significantly. It can appreciate temporarily, if there are large amount of flows happening but that is only a temporary situation.
The right value of the rupee according to the real exchange rate is about 54-54.5. I think the rupee is fairly valued at this point of time. Unless and until, the current account deficit starts to reduce to three percent and below, I do not see much chances of a sustainable recovery or an appreciation in the rupee.
Q: Is supply of paper beginning to look like a problem for the first quarter of 2013? We have started some of these IPOs, government offerings, and lot of OFS happening; if it picks up seriously in January-February could that be a limiting factor on the margin for the market?
A: I think marginally yes, but I think we are still far away from the situation where there is such a deluge of supply that it starts to have a major impact on the secondary market. Of course you have the government disinvestments, which could bring in Rs 20,000-30,000 crore. Then you have this issue about promoters having to reduce their stake below 75 percent by June, which could also cause some supply to come into the market. But we are not really at that stage yet, where it could start to have a very major impact.
Q: From an investment approach would you use the current weakness to start making some purchases in the market or is it still extremely uncertain?
A: Except for this US issue, things are definitely getting better and one should be investing on dips. But for the next week or 10 days, one should really wait it out and see what happens and how this pans out in the US. I think it could become a more serious issue, if this fiscal cliff thing backfires, then you could have a deeper and longer correction from here.
We must remember that the market has been going up for quite sometime, and they have actually gone up from 4,700-5,900 over the last one year. It was around this date last year that they touched 4,500 levels, so you could have some deeper corrections. It is an issue which could impact fundamentals for the next six months.
So I would wait at least for the next few days to see how this fiscal issue pans out. If it pans out well, and things look good then it is definitely time to add on to your positions.
Q: Do you sense any small change in retail interest? We are not seeing it in the domestic redemptions yet, but have you seen any changes on the ground?
A: There is some marginal change; more positive sentiment towards equities, but I think it has still not picked up a great deal. The political situation will have to improve in a more sustainable manner before you see a real large interest coming into equities from the retail sector. Having said that, yes, I definitely see a little bit of improvement.
Q: Do you buy this excitement on NBFCs? Some of them have been the big performers over the last three-four months on anticipation of banking licenses. Is it overdone or is it a good tree to bark upon?
A: I think for the medium-term it is good, provided of course you select the right NBFCs which finally do get a license because that can have some really good value, there is no doubt about it. Also a declining interest rate structure would probably help them going forward both in terms of their margins as well as in terms of volume growth. If one believes that the economy is going to do well and the markets are going to do well I think some of them could be reasonable investments to look at.
Q: How much of a deterrent or impediment do you think politics is going to be next year? There was a lot of interest around the Gujarat elections yesterday, but next year how big a problem do you think it is going to be?
A: That is a difficult question to answer as politics always is. Till at least the Budget session you should not have any problem but after February-March things could get a bit tricky as you approach that date of May 2014. It is really difficult to say how the political situation would pan out and one needs to be more careful after that February-March period.
Q: Are you bullish on the Budget this time around? There are opposing views on that. Some believe it will be very populist, others believe that the FM’s recent statements indicate that it will be a tight tough budget. How do you think the markets will approach that event this time?
A: I think before the budgets you could have the rally continuing of course subject to this US issue. You could have a pre-budget rally till maybe mid-February or end February, but if you have a significant rally and the market reach those 6200-6300 levels by that time, then after that the markets would go into a significant correction in spite of whatever the budget maybe. Because the budget is going to have to balance the very tough fiscal situation we are in as well as the fact that you have an election year coming forward.
So the government would try to balance both the populist, as well as the fact that they do need to have a fiscal consolidation given the fact that otherwise there could be an imminent threat of a rating downgrade. So the government would try to balance both the things. The reaction to the budget and whatever might happen to the markets after that would probably depend more on where the markets are at that time rather than what happens in the Budget itself.
Q: There has been some concern about the nature of foreign flows we have been pulling, in the sense that it is regional and Exchange-Traded Fund (ETF) in nature. If this global uncertainty lingers do you expect to see a sharp reversal in flows?
A: The liquidity is going to remain loose, there is no doubt. If it happens that the fiscal cliff actually turns out to be negative, there is a good chance that the US Fed will probably add more liquidity than they are doing now. So the liquidity situation I think is going to remain pretty good at least during the first half of calendar 2013 if not more.
So you will always see money coming in. Of course a very negative sentiment can probably stop flows for a little bit of time, but if the markets then correct, I would think money would still come back. So I do not think international liquidity is going to be a problem at least for a few months to come.