Cautious on Indian mkts, commodities a safe haven: Baer Cap

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Corruption is a way of life in emerging markets like India, said Alok Sama, President and Founder of Baer Capital in an interview with CNBC-TV18. He added that the government's response to corruption may be a long-term positive.

Sama feels that most emerging markets are overvalued to some extent and said he was cautious about the Indian markets now. Indian markets are mainly driven by FII flows but the market needs more domestic investment to outperform, he feels. "Indian markets need to see more retail and mutual fund participation," he said. Sama expects the global macro news to impact the Indian risk appetite.

Sama is positive about the oil story in terms of fundamentals and expects an outperformance in crude price over the next one or two years.

Commodities, he considers as a safe haven investment, however, he said he would be weary on the speculative element in prices.

Below is a verbatim transcript of Alok Sama's interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy. Also watch the accompanying video for complete details.

Q: We have seen some kind of FII selling in India as well and we have seen a fairly decent run up in the US markets, especially the S&P now trending towards the 1,250 mark. Is this trend of money going from emerging markets to developed economies a big worry for an India investor?

A: The concern you refer to, has seen a fair amount written and said about it. There is some reality and there is not just perception that emerging markets are overvalued and that there is better value to be had in developed markets. There is certainly some truth in that. But the analysis is a lot more complex.

To me, a lot of the volatility in global markets is going to be driven by two major forces. One, which has been in the headline a lot, is the whole issue with respect to sovereign debt. Particularly, in continental Europe there is a real sovereign debt crisis approaching.

You have seen across the world, including United States, a very substantial rise in government interest rates. Some of that is related to optimism. But by and large, there is very serious concern about the sovereign debt problem in developed markets.

Concerns about those headlines newsflows related to that, over the next few months I think will be a major factor that impacts risk appetite. That will impact emerging markets as well as developed markets. So that is one thing to be certainly aware of.

Europe in the near-term has some compelling issues that need to be addressed. But even in the US, I do think there is a leadership crisis because you haven't seen the same type of leadership as you have seen in the UK for example, in terms of getting ahead of the curve and tackling the deficit issue. That is one major issue I would highlight as something that will continue to create volatility in markets.

The second issue is growth. You saw Jim O'Neil from Goldman Sachs make some pronouncements yesterday about expectations that the US market could move up higher by 20% in the coming year, mainly based on a rosier or a more optimistic return to normal scenario in the US. I guess the jury is out on that. We remain skeptical.

I think recovery in the US housing market is fundamental higher interest rates. Higher mortgage rates in the US which you have seen over the last month are not particularly conducive to a sustained recovery in the housing market either. That is another factor to watch. As you see those forces play out, to a degree that will determine which way the markets go.

Q: There are a couple of concerns like the tightening of liquidity and the hardening of commodity prices. Do you think the Goldilocks situation that our markets were enjoying in 2010 has come to an end or do you think the markets will take on a new high in the early months of 2011?

A: In the Indian markets, over the last few months we have moved from being almost maximum long in the 95-96% range to more the mid-eighties. We are somewhat more cautious than what we used to be. There is a possibility that markets globally continue to move higher.

It would not shock me but it is fair to say that we are somewhat more concerned about flows into the emerging markets. What has driven Indian markets over the last year has been FII flows. You have had FII flows break new records.

For this rally to be sustained, you need to see some real evidence of Indian retail mutual funds, in particular, stepping in and participating in a major way. Absent that, I think probably a rangebound market. I am not unduly concerned about a market crash but somewhat more cautious than we were a few months ago.

Q: So have you tactically adjusted your portfolios for any new sector overweight's?

A: Not any major sectoral adjustments. Our major bet in our portfolio which is about 20% of our portfolio is IT. IT has been the best performing sector over the last 12 months. We think sometime over the next few months that story would have run its course and we are likely to cut back.

We are long commodity stocks, steel, aluminum, though, that is more of a short-term trade. The core portfolio that will not get a hold on for many months is built around the domestic consumption story in particular. So FMCG stocks, auto stocks in particular, are at the core of our portfolio.

Q: Inflation is clearly driving up asset prices. Do you like the metal space or do you think it is speculative?

A: The commodity story to a great degree is speculative. People view commodities as an alternative store of value, like gold in particular relative to US treasury bonds for example. You see commodities being a bit of a safe haven, a bit of an inflation hedge based on the concern that you have got QE2, QE3, monetary easing and the debasement of currency.

As a result commodities potentially become a superior source of store value. There is lot of that going on as opposed to an intrinsic bottom up demand for commodities. That makes us cautious by its very nature. It may reach a bubble proportion. For example, commodity prices are decoupled with something like the Baltic Dry Freight index which is a good barometer of activity and demand for commodities.

Q: What is your sense about macro issues like inflation and higher interest rates? Do you think they could cause a deceleration in earnings? Would you be trimming EPS estimates?

A: Not unduly concerned about that. The monetary tightening in India may well have run its course for now. The RBI, we think has done a remarkably good job of timing its monetary tightening.