Budget 2012-13: Market headed higher; see 5500 if RBI cuts rates: Ambit Cap

Money will continue to flood our system, according to him. He says that when foreign investors look at the Indian Budget, they are searching for cues on economic growth. With the infrastructure space getting a big leg-up this time around, maybe order flows will be the catalyst which gets the market going up a bit more than what we have been seeing in the last few weeks.

Below is an edited transcript of his interview. Watch the accompanying for more.

Q: All the events have played out and we are stuck in a bit of a trading range. What is easier to justify fundamentally, some more correction or a move back to those 5,600 kind of levels on the Nifty again?

A: I kind of liked the Budget. I thought it was okay. It keeps domestic consumption ticking along with emphasis on infrastructure investment. When you are looking at what you came into the year looking to buy, then you are nibbling away at the interest rate sensitives and infrastructure, now I think you can go with a little bit more conviction. So that should take the market higher. We could easily get to that 5,500 if we have a rate cut by the RBI which is probably going to happen sooner rather than later.

The one risk coming out is that we have had a very mild winter in the US and in parts of Europe. I don’t know how much that’s been skewing some of the great numbers that we have been seeing. With a high oil price maybe we will start to see domestic consumption in the US taper off a little bit.

So, second quarter figures will be quite interesting to watch from the US to see if that growth is sustainable. That’s a risk which the market is not really factoring in. That is the only thing I see on the horizon which is negative apart from the usual European suspects.

Q: What are you hearing about money because that’s been on our side aside from any disappointment over the Budget?

A: Money flows have continued. Foreign investors do get excited about the Budget, but it is pretty much a non-event for them. As long as I see that the direction in terms of growth is still positive then that is what they are looking for. We could keep arguing about the fiscal deficit whether it is going to be 5.1%, 5.4%, 5.6% but that’s within a reasonable range and I don’t think anyone is so negative about the fiscal deficit that’s going to keep them away from India.

It’s really a fact that the infrastructure sector is going to get kind of a big uplift from the Budget which is what investors are looking at. You are not going to see it overnight. It’s not as if bridges or roads are going to appear overnight but it will start to happen now and maybe order flows will be the catalyst which gets the market going up a bit more than what we have been seeing in the last few weeks.

Q: Do you expect liquidity to keep the market grinding higher for the next three months or do you see the risk of a sharp correction which takes the Nifty to 5,000 or below?

A: No, liquidity will continue to be there. I don’t think we are going to see anything change in Europe. As we get towards the end of June then all eyes will be on what the Federal Reserve will do in terms of QE3. So in that respect you can see that liquidity will play a role for the market. I don’t think that’s going away from us. I am pretty sanguine about the liquidity situation and we will be okay in that respect.

The risk is really the kind of data coming out from the US in the second quarter given the mild winter and that’s something to look at obviously. I have flagged China recently as a risk area, as we are seeing slower growth there with the property market coming down. That’s good in a way because it will keep commodity prices lower and that’s good for India. We are okay for the next two to three months.

Not any really big moves. The one area you have got to look at is the oil price and what happens in Iran. We all know what the upside could be for the oil price but if Iran was to go away tomorrow then you take USD 10-15 off the oil price and again that would be great for India. By and large, we are going to start to see flows continue to come into India. I think the Budget was a good Budget and keeps India ticking along at a reasonable healthy 7.5-8% GDP growth rate.

Q: Some global market watchers have warned that come April perhaps is when we will see a little bit of risk aversion come back into the system and could represent as much as 10% downside risk for equities. What probability would you attach to that? How much downside risk do you see for India right now?

A: From the highs from where we were, we saw a good correction of 5-7%. Maybe from here, it gets back to the 5,000-5,200 if that risk does happen. But I am putting a low probability on that. I am not seeing anything out there apart from what we already know as being huge risks. I put a probability of a very sharp correction, maybe 20-30%. So it’s a low probability from what I can see at the moment.

Q: What’s the upside to you? In the next quarter or so do you think there is substantial upside or that the market can merely move up 5-6% and at best consolidate?

A: No, we can see the market getting to 5,500-5,600. The Budget is the catalyst behind this. If we get some order flows coming from the government towards infrastructure and we are already seeing a pick-up in terms of issuance of bonds for helping the infrastructure sector then that’s a catalyst that the market needs.

If the RBI delivers an interest rate cut then interest rate sensitives come into play. The domestic consumption story remains on track and now you can add a few more sectors which will help push the market higher. That’s what we expect to see. So probably test 5,600 first before we see any correction.

Q: The number from the Chinese PMI this morning is quite bad. For the fifth month running there is contraction there. What ramifications does it have for global markets, global commodities and even stocks in India which could be exposed to the Chinese market like Tata Motors?

A: Yes, it’s something which I have mentioned before. In the beginning of the year no one was really working on the basis that there is going to be a growth scare from China but the noises have continued to get louder and louder about this. We don’t think it’s going to be such a hard landing. We think China is going to grow at 8-8.5%, so a little less worried about that. But the good news is obviously with the property market cooling down which we think it is then that’s going to lead to lower commodity prices which are good for India Inc in terms of lower inflation, maybe not for some of the commodity companies.

Our view going into the second quarter is that the sectors which we are bullish on we would continue to pick up stocks there. We are perhaps looking at the shorts being more in the commodities sector which we think will come down. On Tata Motors and Jaguar, I always felt that that was a little bit of hope anyway that that would continue for them. It’s a great long-term story for Tata but I don’t think I would be buying on the back of huge sales to China. It is going to be a slowing market for them.

I don’t think it’s that significant that it would worry me one way or the other. The message I am trying to give is that a slowing China is good for India and that’s probably why we are seeing a lot more flows coming into India from FIIs because lower commodity price equals lower inflation equals lower interest rates.

Q: The rupee has been losing ground steadily. There is talk globally of the yen carry trade getting a new lease of life. How would you read what’s happening in the currency market space right now?

A: It’s slightly confusing, isn’t it? You have seen all those flows but really you haven’t seen the rupee move so sharply below 50. I can only assume a couple of things. It’s costing you more to buy oil and two, maybe it’s starting to reflect that interest rates are going to be heading down in India. But I am not a currency expert in terms of the rupee and I am sure the RBI will step in at some point again to support the currency.

FIIs coming into this year are working on the basis that it was just over 50 when they came in. So it’s not such a big depreciation that they are looking at compared to last year when it was very significantly at about 15-16% which hurt their funds. I don’t think on a long-term basis you will see the rupee depreciating too much from here, it maybe will get to 52 again. But maybe that’s why also the IT sector is holding up and we are starting to see some good gains in that sector over the past month or so.

Q: Tactically, how would you play any potential upside? Would you still go with high-beta or are you changing that call around?

A: If you are expecting the market to go to 5,600 then obviously high-beta smaller midcaps will play out for you. But there are plenty of gains to be made in some of the largecap stocks. We are keeping the largecaps for the moment and dipping our toes into the more high-betas as momentum starts to pickup for the market. We want to own them on a long-term basis, so we will rent but we won’t own them.

Q: Do you see the risk of inflation coming back at some point in the middle of the year because of crude or any other reason and the RBI moving very slowly or much too slowly for the equity market’s comfort on the interest rate cuts?

A: Yes, expectations were there when we had this liquidity gush in January, February obviously everyone’s expectations were for the quantum and the scale of RBI cuts to be a lot higher. Those have tempered since the Budget. When you came into the year most people were looking at 50 bps initially in terms of interest rate cuts. You just got a little bit skewed when all were getting too bullish in January and February. But most investors will be looking at interest rates continuing to head south as the year unfolds rather than get one big bang reduction. Obviously that could happen if the world falls apart. I am not banking on the RBI being aggressive anyway, that was never the way we were thinking but interest rate sensitives will continue to do well over the course of this year and that’s where we are putting our bets now.

Q: Do you think earnings in April will be along expected lines and may not move the needle too much for the market either way?

A: I am less worried about this quarter’s earnings. I am now looking at next year and looking for 10-15% growth. If we are going to start seeing some orders come through in the infrastructure sector that will be the fillip for earnings upgrades again. In the coming year we will see earnings upgrades rather than downgrades and that’s why we will see the market get to 5,600 on the Nifty in the next quarter.