The ongoing rally is more of a technical pullback after a steep fall, Vibhav Kapoor, Group CIO, IL&FS tells CNBC-TV18.
Kapoor says this will be a year of global developments and that the market will be more influenced by global factors than domestic ones.
He says it does not appear as though global markets have discounted developments like Fed stance on interest rates, strengthening of dollar, falling crude and now the Presidential elections in the US.
On banks, Kapoor says the recent RBI directive will hasten the recognition of non-performing assets by banks and drive a faster clean up of balance sheets.
And while banking stocks have fallen sharply, he says investors should not be in a rush to buy them. He advises waiting for at least a couple of quarters to get a sense of how big the NPA problem is and what the capital requirements are likely to be.
And while retail inflows into mutual funds have dropped of late, Kapoor says broadly domestic fund managers are still positive in their outlook on the market.
He expects a recovery in the rural economy in the coming fiscal and auto is among the sectors he is looking to play that revival.
Below is the verbatim transcript of Vibhav Kapoor's interview with Sonia Shenoy & Reema Tendulkar on CNBC-TV18.
Reema: What have you made of the pullback so far, 7,240 to 7,550, more to go according to you and what should be an investor reaction to what happened, the big fall and now there is a mild pullback?
A: I think this is just a technical pullback. The market has fallen sharply in January. As I had said in the last interview that this is a year of global developments and market is going to be more influenced by the global factors than domestic factors and all the uncertainties that we have talked about and which are there, China, the US interest rates, threatening of dollar, oil prices and maybe now US political issues in terms of the Presidential election, all those remain as they were. The issue is whether market has discounted completely all of these uncertainties. I do not think that has happened and therefore the pullback is just a technical pullback, otherwise the downtrend in the markets globally continues.
Sonia: One sector which is completely rocked by the Reserve Bank of India's directives and that's the banking space. The RBI's directives to disclose more non-performing assets (NPAs), to make more provisions for bad loans etc has caused a lot of these banks to report higher provisions, weaker numbers. There are expectations of public sector undertakings (PSUs) to report losses this quarter as well. How do you approach banks at a time like this? Do you look for opportunities in private banks or do you just stay away from the sector for the time being?
A: This is a good development because this will hasten the recognition of NPAs and make balance sheets of the banks clean and therefore from investors' point of view you will get a much clearer idea as to how big the problem is in various banks. So it is a positive development but you need to watch out for the next two quarters particularly for this quarter's results to see what sort of impact this is going to have on balance sheets, further capital requirements of banks etc. Right now it's a sector to keep away from, wait for this quarter's result and then start taking some view and maybe in some cases you might need even to wait for next quarter results before you get a clearer picture of what the situation is.
Reema: You are saying in two quarters hence banks would look attractive because all the bad loans will be declared and that perhaps be reflected in valuation so perhaps you could buy cheaper?
A: Hopefully yes, that's exactly what I mean. You need to have a clear idea of how bad the situation is with each bank in terms of NPAs and what are their capital requirements going to be going forward. Once you have that and the market has adequately priced that in then it could be a good time to buy these banks at lower prices.
Sonia: You talk to a lot of domestic investors. What is the feedback from the market now because now we have started seeing some amount of selling emerge from institutional investors? We saw about Rs 500 crore of selling in the cash market yesterday. Are people redeeming or are they still keeping the faith?
A: The press report say that there is still a lot of reasonable amount of money flowing in domestic mutual funds and even January saw good inflows. I think probably the fund managers are becoming a bit more cautious and they are raising their cash levels in order to take advantage of further falls in the market, if they happen over the next couple of months. So I do not see any change in attitude of domestic investors at this point of time.
Reema: What have you made of the earning season so far? Has it positively or negatively surprised you?
A: It has been as per expectations, maybe a little bit lower than what market consensus was and given what we had expected. The way results are going, we are going to see maximum of 3-4 percent growth in profits for this quarter year-on-year (YoY) as against expectations of 7-8 percent and that also means that maybe Q4 also may not be as per consensus expectation, so you will see further downgrades in consensus EPS for FY16 and possibly for FY17 going forward.
Sonia: You do not talk individual stocks but there were some bright spots in this earning season whether you talk about largecaps like Infosys, Asian Paints, Zee Entertainment or some midcaps like Marico, Emami etc, any of these stocks where you think now is a good time to increase your allocation?
A: I would not want to talk about single stock but the thing which we are looking at is that going forward the rural economy should start to do better in FY17 particularly. The government is likely to take some steps to bolster the rural economy in the Budget and in other policy measures. Hopefully if we have a reasonable monsoon this time, I think that is an area where the opportunity is coming. So fast moving consumer goods (FMCG) stocks, some of which are oriented towards the rural market maybe some two-wheeler stocks which are oriented towards two-wheeler market, those are the sectors where one would be looking to buy at lower levels.
Reema: What have you made of auto sales numbers which are trickling in. The numbers appear to be fairly lacklustre barring one or two bright pockets. Is auto space that you would play into?
A: The economy is still pretty slow and that's reflected in the auto numbers which we saw yesterday. However, going forward in FY17, I expect the rural economy to start doing much better and that would also have a positive influence on auto numbers. So that is one of the sector we would be looking at lower prices.
(Interview transcribed by Mitali Mohite)
More to follow.....