SENSEX NIFTY
Jan 30, 2013, 03.44 PM IST | Source: CNBC-TV18

BofA ML expects 'great rotation' to happen this year

Jyotivardhan Jaipuria, Head of Research at BofA Merrill Lynch says most of his clients are modestly overweight on India right now.

Jyotivardhan Jaipuria, Head of Research at BofA Merrill Lynch says most of his clients are modestly overweight on India right now. Shareholding of foreign institutional investors (FIIs) in domestic companies has scaled at least a six-year high because there has been a flight of funds to emerging markets such as India. With central banks in Europe and the US keeping interest rates low, overseas funds have flowed to markets such as India, Brazil and China.

Also read: Indian shares rank 35th in dollar returns 2013 globally: CS

Going forward, Jaipuria is expecting a lot of volatility. He is betting on the great rotation, which is the movement of bonds into equities. "Our global strategist says that if we look at a two-three year view, probably the big trade is more money will flow outside bonds and get into equities because equities have been under invested for the last few years," he told CNBC-TV18 in an interview.

For the short-term, he says, there will be a bit of volatility and somewhere in the middle of the year, markets should correct by 8-10 percent before it gets into this greater rotation where money goes back to equities. "We see some movement up in interest rates. We probably may see equities getting hurt," he told the channel.

Below is the edited transcript of his interview to CNBC-TV18

Q: Would you say that from a relatively low ownership position, now India's weightage have got recalibrated and people are more or less overweight?

A: Our analysis shows that most people are slightly overweight, if one takes the aggregate. I have been meeting lot of investors over the last few weeks. Most people now seem to be neutral and slightly overweight. So, that easy trade via India was underweight and under owned by most people, is probably more or less behind us now.

Q: Are you expecting to see any volatility in funds in terms of some outflows now?

A: There will probably be lot of volatility. However, our big trade is the great rotation which is movement of bonds into equities. Our global strategist says that if we look at a two-three year view the big trade is, more money will flow outside bonds and get into equities. Equities have been under invested for the last few years.

Short term probably will be a bit of volatility. As we see some movement up in interest rates, we may see equities getting hurt. So, expectation is somewhere in the middle of the year markets should correct by maybe 8-10 per cent before we get into greater rotation, where money goes back to equities.

Q: In the near term is there a case for a tactical pullback in the market?

A: There probably is. The market had a good run and to that extent we could get technical corrections on and off. However, my view is typically we have the pre-Budget rate play out. So, probably before the presentation of the Budget, we may actually be higher than where we are today. Expectation will be higher in the run up to Budget and that is going to be great project.

Q: Do you see interest rate cuts being a big propellant for the equity markets over the next three-six months?

A: When we started the year, we had three ‘R’s, interest rate cut, reforms and consequent to both of these, recovery in economy and earnings. There is more on interest rate cuts to come. It probably may not come at the same pace at which some optimists in the market were expecting. However, we could see another 50 basis point of interest rate cut over the next six months.

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