India inflation fears overdone, worst maybe over: Baer Cap

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After a fabulous 2010, this year has been horrendous for the Indian indices so far-the correction has been steep with markets constantly drifting lower. But, Alok Sama of Baer Capital feels the worst is probably over for India. "We have probably seen the worst run-up in oil prices. Also, I feel inflation fears here are probably over-done," he told CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee in an exclusive interview.

However, he continues to believe that India is among the most expensive emerging markets where food price inflation remains a matter of key concern. "Also, the outflow from India is not very significant," he stated.

On the back of a fairly robust earnings growth, he feels 17,500-18,000 on the Sensex and 5,000 on the Nifty are reasonable levels to think of in terms of markets being well supported.

Talking about Baer Capital's exposure in India, Sama said where on one hand they had pulled back on IT services exposure, banking was a space they were increasing their exposure in.

Below in the transcript of Alok Sama's exclusive interview on CNBC-TV18. Also watch accompanying video.

Q: How have you read the turn of events over the last few days and how much have stock prices fallen, do you think most of the damage is in the price already?

A: Let us put that discussion in a global context and let us talk about flow of funds first of all. There is a broad reallocation of funds out of emerging markets in favour of developed markets. In fact, I believe there was a headline in a news paper that suggested that USD 7 billion has last week went out of emerging markets, which is quite a significant number in a compressed period of time.

That is driven by a number of factors. Some of which are plain investor psychology when you have had something that has run up in the way emerging markets have run up, there is a tendency always to pause and take a breath.

There is a perception that emerging markets are expensive. India is the most expensive emerging market. So there is a perception that emerging markets were overvalued, there is a perception that the recovery in the western world and in the US in particular might turn out to be more robust than people believe. There is, if you look at recent events, a perception that people have underestimated the political risk dimension associated with investing in all emerging markets.

And then, very importantly, there has been a lot of focus on inflation and food price inflation in particular, because that tends to be a very big component of the consumer basket in the emerging markets.

So with all that put together, it is a case of emerging markets (and India is no exception) going out of fashion and that's a lot of what is going on over the last few weeks.

We take the view that with respect to India the worst is probably behind us and the correction by and large is healthy.

Q: That is the big question about the flows, this has been a rough week for us, do you expect there maybe more in terms of selling pressure?

A: If you look at the FII flow figure for India in the month of January, I was actually surprised. I thought the numbers in terms of outflows would be significant but the actual number is just over a billion dollars, which is not a lot. So I think that there are local technical factors, but the dramatic outflows out of India are probably behind us-that may be optimistic on my part but that is certainly our view.

People are willing to engage and look at India from an investment perspective. So, we are optimistic. In fact, we have been at 80% net long in our long-short equity fund, and intend to increase that. We think there are values out there and we think there is value in financial services and banks in particular. So we are increasing our exposure in that space. But we are pulling back on other sectors, which have run up in anticipation. In fact we have invested in anticipation of being there to global recovery, IT services in particular. Our view is perhaps a little bit different, bullish than what you have been reading in the headlines.

Q: What kind of levels do you think this market is supported at from the perspective of the index or the Nifty?

A: We kind of think from a fundamental perspective. I mean let us not forget that this is all about earnings at the end of the day, which has been fairly robust. So I think somewhere around 17,500 even 18,000 on the Sensex and 5,000 on the Nifty are reasonable levels to think of in terms of markets being well supported.

Q: Just on that point you were making about liquidity-are you seeing it in terms of redemption pressures whether for India funds or BRIC funds?

A: I think that certainly happened. I was at the Goldman Sachs conference in mid-January and one of their top trader's view was long Taiwan and short India. I mean he was seeing Taiwan as a market that is geared towards growth and aggregate demand in the Western world and India sort of being the poster child for attractive emerging markets, which are now kind of pulling back. So I think there were clearly shades of that. I would like to think that the worst of that is behind us and I think that the correction is in fact healthy and provides a base for the market to build on and to recover over the next few months.

Q: Have you started buying in India over the last few sessions and have you increased your net longs?

A: As I said, we are buyers at these levels. So we are building up from our 80% net-long position. We expect to get that up to somewhere in the region of 90% in the short order.

Q: The big concern, when we speak to a lot of investors, remains the inflation issue-is that big deal to your mind as well and do you feel we are running a bit behind the curve here?

A: With respect to India the inflation fears are probably overdone. While longer terms you want to talk about two to three years, I think that is very important supply bottlenecks that drive oil prices higher. But I think in the near-term you have probably seen the worst of the run up in oil prices. So I think there is potential for some moderation, you have seen that in the last day or so already in oil prices. I think with respect to food prices you had a bit of a supply shock in the prices of vegetables in particular in India.

But let us not forget that we had a good monsoon, that India is a net exporter of grains and that it is a case of supply bottlenecks that are preventing the flow of food grains into the markets. And once that happens, people get much more comfortable with the overall outlook for food prices in India.

So I actually think that it is clearly a concern but we think that the Reserve Bank of India has, by and large, been ahead of the curve in terms of tightening and we think that the fears with respect to commodity prices food prices, oil in particular are likely to recede, we are concerned, very watchful. But again perhaps not as concerned as some of the headlines might suggest, as other people seem to be.