May 16, 2013 01:42 PM IST | Source: CNBC-TV18

Rally signals cyclical recovery, not bull run: Pramerica

BP Singh, ED & CIO - Equity, Pramerica MF says, yesterday's rally in our market reflects only a cyclical recovery and long-term uncertainties still continue to exist.

The ongoing rally in Indian equities reflects a cyclical recovery only. One cannot be sure if this indicates beginning of long-term bull market, believes BP Singh, ED & CIO - Equity, Pramerica MF.

The long-term uncertainties and structural issues continue to exist for our market, Singh said in an interview to CNBC-TV18.

“We are not so excited on the interest rate cuts. In India, savers are moving away from financial assets to physical assets, which is a concern. Interest rate cut is not helping to improve that cause,” he said in the interview.

In such a scenario, one should focus on valuations and quality while investing in any stock, he suggested.

“Look at corporates who are incrementally cash generating and profit making. In April we were underweight on IT, but now IT valuation-wise is reasonably attractive, so we are moving into that. We were reasonably long on banks, but now they are getting overvalued, so we have gradually started reducing our position,” he elaborated.

Also read: Rating upgrade seen; early to call interest rates: Axis Cap

Below is the verbatim transcript of his interview on CNBC-TV18

Q: How are you calling the market after what looked like a fantastic breakout yesterday for trade? Do you think the meat of the rally is behind us or is this looking different than the previous rallies we have seen?

A: This time it is slightly different than what we had seen in the past, though I would still not stick my neck out and say that we are getting into any kind of long-term bull market, simply because this is just a cyclical recovery and the cyclical gain which we are having. It is up to us to convert this cyclical gain into a structural gain.

There are long-term structural issues, which India faces and which we obviously need to focus on and correct. Although, what is good about the current rally is that it presents us an opportunity both in terms of the liquidity, which is coming and the commodity prices which are declining. For the first time in the last few years, the direct relationship between liquidity and the commodity has broken down and that is fantastic news. So, if we compare what we have witnessed since 2008 then we have been presented a good opportunity and it is up to us how we capitalise on that.

Q: Do you see more headroom left for interest rate sensitives and do you think the market’s expectations of more interest rate cuts will actually follow-through?

A: We are not so excited on the interest rate cuts. The one structural issue that bothers us is that in India the savers are moving away from financial assets to physical assets and interest rate cut is not helping to improve that cause. Most of us think the interest rate cuts will have the same kind of impact than it had in the western economies. However, as far as India is concerned, one can see that the savers are not leveraged, it is the manufacturers who are leveraged.

A rate cut generally results in lower deposits and more space for the inventory holder to carry on the inventory for a longer period and that is why you notice that in the past few rate cuts have not been transmitted to the investors so easily. So, it is not the rate cuts, it is the commodity price decline, which probably is presenting a good opportunity, and if that results in the core inflation, particularly the consumer price inflation coming down further then that would be an opportunity for us to capitalise on.

Q: How would you position your portfolio now? If you have to play this upside in the market admittedly as you said if it is a cyclical upmove what kind of portfolio position would be recommended?

A: At this point in time keeping in mind that we have slipped from 9 percent GDP growth rate to sub-5 percent kind of growth rate, the asset quality is obviously very important. Therefore we will focus on those corporates or businesses who are not only cash generating, but those who will be generating cash incrementally and are profit making.

We are looking at valuations and so wherever we find an undervaluation situation we get into it. When we walked into month of April we were underweight on IT, but now IT is presenting a scenario where it is valuation-wise reasonably attractive, so we are moving into that.

We were reasonably long on our banking positions, but now in terms of the valuations they have started presenting a situation where you find that they are getting overvalued. So, we have gradually started reducing our position over there.

It is more of a scenario where one should be very focused on valuations; one should be focused on quality, because the cash generating ability is most important. The quality of assets because of the slowdown is a reasonable area of concern and one needs to be very careful about that.

Q: For technology the numbers have been poor in but this recent market rally has led some of the liquidity and interest back to that sector. What is your view on that?

A: As far as the technology is concerned, the numbers were not as per the expectations. It was driven more because of their users that is on the global side, the demand was not very robust and the cost inflation from the domestic market was quite high.

Valuations have actually come to a place now, where they become attractive. If we carry on this manner in which the liquidity is being pushed into the system, if we carry on in this manner in which the inflation is coming down into the country, it might improve the operating margins or arrest the decline in the operating margin, which we have witnessed in the last few quarters, and the valuations are definitely a big supporter. So we have started increasing our weight in this particular sector.

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