Tushar Pradhan, CIO, HSBC AMC believes that global fund flows are the main reason for the rally in Indian market and expects India to be on investors‘ radar if global fund flows continue.
The current D-Street rally is aided by global liquidity injection by counties like Japan and US; but one cannot be sure if this rally will sustain as the fundamentals of Indian market don't indicate anything dramatically better than before, believes Tushar Pradhan, CIO, HSBC AMC.
India will continue to be on global investors' radar if global fund inflows continue. A significant rally by the end of this year is possible if foreign investors continue to park funds in the market and domestic factors favour the indices, he told CNBC-TV18.
On the macro front, given that inflation seems to be coming down to the Reserve Bank of India's comfortable level, one can be hopeful of a sharp drop in rates.
Pradhan maintains his overweight stance on oil marketing companies. He feels recent fall in crude prices has made oil stocks attractive and investors should consider them.
On the flip side, he finds FMCG stocks expensive now and is not so upbeat on the sector. He further added that decision on US Immigration Bill will haunt the IT sector and things may not turn out to be a very positive for this sector.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: What have you made of this big rally over the last few weeks? Do you think it is sustainable?
A: Internationally, there has been a huge infusion in liquidity beginning from Japan sometime ago and then eventually the bond buying exercise in the US as well as other parts of Europe. Obviously, as liquidity builds up in the system, risk on is something which is a likely outcome. All regional markets, not only India, but all equities across the board have seen that impact.
So, India being a recipient of very large chunk of that liquidity is really the cause for the rally. Because, if we look at the fundamentals, there isn’t anything yet to indicate that there is anything dramatically better than what we were looking for maybe three months ago.
So, on the whole, I would call it a global phenomenon - global liquidity wave which has risen and that has helped India do what it has.
Q: Has it changed expectations any, for what the second half of the year could yield for the market or are you approaching it as just that - a trading rally right now that could retract, if liquidity does as well?
A: I won’t go far as much as saying that but the second half is going to be a very interesting one for India because the Indian elections are due, probably by the middle of next year and that is the time that the government will then have to not do any of the reforms that it has planned to do because then they will go into some sort of shut period, which is prior to the election.
By that time, obviously there will be a lot of other factors at play and all of the political parties will get fairly active at that time. The markets will then bear the brunt of whatever is being revealed at that time.
So, the second half is a real difficult one to call. My belief is that the Indian economy will start to improve at some point of time. However if it coincides with this sort of uncertainty, the market may not really take any direction.
However at the same time, globally if the flows continue, liquidity continues, then India will continue to remain very much in the radar for most international investors.
If everything goes right, towards the end of the year we should see a significant rally. But if there are any other external events or even internal, domestic to India, like elections that calls people to pause about what may likely happen very early next year or middle of next year. They might want to hedge their bets a little bit. So, it is very difficult to call the second half this year.
Q: The last leg of the rally has been led by the rate sensitives. What are your expectations of what kind of rate cuts might eventually come through because expectations have really gone up over the last few days?
A: That’s true and part of the reason is whatever the RBI has been speaking in the past about the comfort zone that seems to have actually come about on the inflation front. So, there is now a renewed expectation that interest rates may come down dramatically because that seem to be the only hold out for the RBI because obviously growth was slowing down and all the other indications pointed to the fact that you needed a lower interest regime to kind of revive growth.
Inflation was the only fly in the ointment as much. But with the inflation now down to where it was, it appears that that road block is over. So we could expect some sharp drop in rates.
Having said that there are few things that we need to keep in mind; one is that the number that we saw is likely to be revised. The other factor is that the major cause for the very steep drop has been due to one component, which is food. Food prices have really driven the inflation index down. We expect that, that is not a real sustainable way to look at inflation in the future. However, core inflation on the WPI also has come down. So there is some confidence there.
However, the RBI having been circumspect all this time is not going to rush in to kind of reduce rates very dramatically. I think they will continue to take a gradual approach.
So, interest rate is definitely on the way down - that is something that we predicted at the beginning of the year. We have seen three rate cuts so far. I think the gradual drop in interest rates will continue well through the year.
Q: Do you see any change in local sentiment or do local investors continue to approach this market as an unpredictable volatile asset class, despite the fall in gold you don't see them being very enthused about this market in a big way?
A: I may say that for all domestic investors, not only in India but everywhere in the world that it is only after the market has really significantly gone up that people start to take notice about this asset class. In the past may be even up to five years, stock markets have not really generated any interest because other asset classes, real estate, gold, have actually provided them significantly higher return than equities and the interest has really died down.
With real estate, I am not again sure whether that will sustain a surprise but the fact is gold definitely is on its way down. Globally, also we have seen some bets taken off by very large hedge funds, for gold as an asset. If the financial markets do start to move up, then gold as a consequence force doesn’t do as well, as we have seen in the past.
So, if the alternative asset classes, which have provided mot investors the return, start to falter and the equity markets start to perk up then clearly there will be some interest but I am not very hopeful that, that will happen right away. The investors really wait for a long time for the gains to be realised and then they start taking some bets at the margins. So, if one is astute of course one should get in now but that is not to say that is how the general public will behave.
Q: You have increased exposure to oil and gas as a space across some of your funds. Do you think that might become the sector and space to look out for in terms of leading the market?
A: That was specifically with a view in mind that commodity prices are likely to come off. We believed that across the board including crude oil that is something which is an adjustment which is likely to take place. That is not more to do with anything with demand so much as the supply factor. We have seen pretty significant supply especially in the US in the form of shale gas come in. Oil and oil related commodities have come down sharply post that.
In India basically, the oil and refining marketing companies are the ones which have the benefit of lower crude prices actually translate into both higher margins, as well as lower subsidy burden and that is one of the reasons why we have taken the call.
Going forward it may spread to other parts of the economy. We may not fundamentally be always invested in oil and gas significantly as an overweight. However at the current moment, we are quite happy to maintain that, only for the fact that there is a structural change here. Globally prices are now in favour of events, which will ensure that these companies will make money. Even locally, the government has made its point clear about pricing these products close to the market, which gives them an affordable chance to make return on capital.
In addition to that the fact remains that these companies on a value basis, if you take a replacement cost initiative, they are definitely very much cheaper than global refining companies. That continues to remain an attractive factor. However, the overall environment where the pricing was very much in control in the government’s hands was a reason why the stocks were really beaten down.
At the margin if any of these things changed, you would likely get a spurt. which we have for sometime now and we think that will continue in the future as well.
Q: On which sector have you guys had reason to significantly reduce exposure because there have been disappointments from technology, FMCG even a few auto names at this time?
A: FMCG is clearly one of the sectors, which we find extremely expensive. We were underweight them all throughout last year as well and we suffered as a result of that because the expensive just got more expensive. However, as usual people expect stock prices to continue to move in a linear fashion into infinity but that never really happens. So, most of the games are behind us.
If there is at all any revival of industrial activity in the near future the market will generally tend to discount that ahead of time. The differential between the cyclicals, manufacturing, mainline operating companies and the defensives, which were in form of the consumption oriented companies, that differential of valuations is likely to narrow. Usually, since we are now seeing very stratospheric valuations for these companies we believe it may come in the form of either a flattening or a reduction in these prices and an increase in the cyclicals going forward. In that sense that is one sector which we are little negative on.
Even in IT, we have got some very conflicting signals there. The largest cloud over the horizon is the US Immigration Bill, which is currently going to be debated in the US Senate. All of those things really don't point to things which will turn out pretty positive for the IT market. If you look at the risk and reward in terms of what to expect out of what may happen in the US, it is more likely that it may just be business as usual and no change or it might be slightly negative. So, given that we are becoming a little more circumspect on IT as well.