Market top at 17000-18000; book your profits now: 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

Alok Sama, president and founder, Baer Capital Partners tells CNBC-TV18 that it is good time to book profits. He says that the markets are seeing a liquidity-driven rally and he expects this rally to fade going ahead. "One needs to be cautious on the market now," Sama says adding, "We have more defensives in terms of sector positioning." Baer is positive on pharma and FMCG, and Sama advices going long on the beaten down sectors.

He sees inflation at around 7.5-8% levels and expects the rupee to stabilize around Rs 50-52 against the dollar.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: You were expecting a year end rally which did not happen in December but certainly happened in January, how are you approaching the market now after the rally?

A: In November-December, we were positioned quite aggressively for a rally which was quite a contrarian view at that time. We took the view that concerns about a meltdown in Europe, at the extreme, would default by an economy, a country like Italy. We thought some of those concerns were overdone. We thought that the base case for Europe was a muddle-along scenario, and we were quite optimistic in terms of the outlook for US growth picture. That has unfolded as we expected in fact better than we expected in the New Year. So we have had an extremely powerful rally. It is very much liquidity-driven, it is a function of markets being positioned too defensively, a lot of cash sitting on the sidelines and we actually do think it is time to take profits. In fact we have done exactly that in our portfolio; we have gone from being 95% long to more like 66% long, and there has been a change in our sectoral positioning as well. We are much more defensive than we were in terms of sector positioning as well.

Q: For India's own macro, how do you think things are set up this year?

A: With respect to India, you have monetary policy and fiscal policy. With respect to monetary policy, we were fairly constructive on the outlook for inflation. We though there was substantial room for RBI to be cutting rate but with what has unfolded with our commodity prices would suggest that the picture with respect to inflation may not be quite as rosy. I think the RBI probably has a bit of less room to maneuver than the markets might expect them to. Given where the government is with respect to fiscal policy, with limited room to maneuver because of the deficit situation, suggests that combination of fiscal monetary policy will not be particularly accommodative and I don't think the markets have priced that in yet. So this is a liquidity driven rally and we expect the rally to fade a little bit with sort of 17500-18000 on the Sensex being the top as the way we call it.

Q: What is it that's feeding money interests so much and so hard?

A: The usual suspect, it is all hot money flows, it's the carry trade. A lot of it is hedge funds which is the reason to be cautious, to be quite honest.

Q: Which are sectors you are overweight and underweight on at this point?

A: Back in November- December, we thought the best way to participate in the rally was to be long the sectors that were sort of most beaten up as it were. So we were long real estate, capital goods, EPC.... We have now taken profits in those sectors and have rotated into much more defensive sectors of the market. So we have shifted towards FMGC and pharma for example.

Q: What about the rupee, we had a spectacular rally, more than the stock market actually over the last one month or so. How do you read that because it's a key ingredient for global investors like you?

A: If you look at what drives the rupee, India is obviously a net importer of capital; we rely on investment flows and on portfolio flows to finance BOP deficits. When you have a scenario like you did in 2008-09, and again sort of deleveraging, complete loss of risk appetite, the way you did once again in October-November 2011, you have massive outflows. That affects India disproportionately and you saw the rupee literally get whacked. I think fundamentally you still got a fairly substantial interest rates differential vis-à-vis the dollar. We think that inflation in India is here to stay. The good news in term of food price inflation is probably behind us, higher commodity prices don't help the case, so we think inflation maybe in the 7.5-8% range is here to stay. Given that inflation differential, we do think that there is reason to be cautious on the rupee, probably around 50-52 which is the right level for the rupee over the next year or so.

Q: How worried are you about crude and the possible impact for India?

A: The transmission mechanism with respect to crude, quite aside from the impact on margin squeezes and import prices is the implications for monetary policy. So monetary policy and expectations of monetary easing and rate cuts have been a big driver in terms of sentiment in terms of what impacted the India markets. We do think that with higher commodity prices, the inflation picture will be not quite as relaxed. I think the RBI will probably will have little bit less room to maneuver than the market expects, and as a result, the implications for the market may well be negative.