Ambit Cap warns not to trade actively around poll results

In an interview to CNBC-TV18, Saurabh Mukherjea, Head of Equities, Ambit Capital advised not to trade actively around election results. "I don’t think it’s that big a deal either way but the outlook at this stage seems to be more downside than upside over the next 48 hours or so," he elaborated.

As an investment strategy, he is positive on Kotak Mahindra Bank , City Union Bank , Federal Bank , Voltas , Sadbhav Engineering , Torrent Power and Adani Power . Mukherjea suggests avoiding banks with high infra and power sector exposure.

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

Q: Yesterday, the market reacted quite negatively. If indeed SP forms the government with close to majority, do you expect to see more reaction on the way down for the market?

A: Clearly, it will be difficult for the market to digest the fact that the Congress will not have any role to play in Lucknow. Some of it has already been factored in; I think there is some more left. What's not going to help the market is that overall global equities seem to be on consolidation mode.

Investors have enjoyed big gains from the beginning of the calendar year across the world and there is a tendency amongst the investors to lock in those gains now. Now that LTRO 2 is out of the way and Europe is clearly in recession, there is a tendency amongst global investors, regardless of what comes out of India, to lock those gains and that is going to exacerbate the downside that we might see today.

But there is an outside chance that the Congress might end the day smiling, if that is the case then the chances of reform in the next couple of months rise marginally. All of that being said, I don't think any one of us are counting on a wave of reform hitting us. It's more likely to be incremental reforms on retail FDI and aviation FDI and probably that's about it. So I don't think it's that big a deal either way but the outlook at this stage seems to be more downside than upside over the next 48 hours or so.

Q: At this point, the market seems to be looking at this political event more as a straw in the wind to pointers for national politics and it's pricing in the worst or the best according to this SP outcome. What to your mind would be a really dastardly outcome of the market? What if there is a curve ball from a party like the BJP or the BSP, how does that go down equity market-wise?

A: The Trinamool Congress has a pretty critical role to play in the coalition, in the center. All of us have seen how that's panned out over the last year. So what Mamata Banerjee says and does over the next five-six days is actually what we are looking at with a lot of interest. If the Congress doesn't have a role to play in Lucknow in forming the next government in UP, perhaps because SP will get a majority on its own.

If Congress doesn't have a role to play in UP then it clearly means that Trinamool becomes that much more valuable as a coalition ally in Delhi. How Mamata Banerjee will choose to deal with that is something I think we are looking at with considerable interest over the next five-six days. My sense, therefore, is that we need to keep a pretty close eye on what Trinamool does.

Broadly, the strategies of SP and BSP are known and they are relatively known quantities given the outlook over the next 24 hours. The news from Kolkata is the one we are keeping a close eye on because that could prove to be the joker in the pack.

Q: Are there any expectations of any sentimental reaction on the ADAG pack? Stocks like Reliance Power have rallied some 13% in the last couple of days. It's at a 52 week high actually. How would you approach faces like Reliance Infra or Reliance Power now?

 A: Our client base is entirely institutional and the tact we take with our client base is don't try to trade actively around election results. (A) These results are obviously difficult to call but (B) I think this is increasingly the case in India. Election is a sustainable driver of stock prices or politics is a sustainable driver of stock prices. It is increasingly becoming irrelevant.

Power in India has become so fragmented whether it is power in Delhi or on the national basis that it is becoming very difficult for any one party or a politician to actually deliver financial gains to any corporate or group of corporates out there.

So we are advising clients not to see the election results to buy this stock or that stock. The overall tact we are taking with the market as a whole is buy high quality names, buy strong balance sheets because whilst the economy is gradually turning, interest rates will stay high for an extended period of time.

We are factoring in no more than 100 basis points or cuts from the RBI over the next 12 months - that will still leave interest rates very high. So in a relatively low growth, modest growth environment with relatively high interest rates you do need to be invested in solid companies with strong balance sheets. Wherever you do see that, we are asking clients to invest regardless of election results.