Baer Capital sees Sensex rising to 21000 by year-end

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Sensex to rally 1000 points in four months: PN Vijay Refreshing rally: Is it prudent to stay long? Expect Indian markets to consolidate ahead: RCM Bank rally can lead mkts higher: Atul Suri ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 10/02/12 Are Mutual Funds betting on Nifty?

Despite lacklustre movement of the indices globally, India has been holding up, and this trend, according to Alok Sama, President and Founder of Baer Capital, is expected to continue given good liquidity. In fact he sees a possibility of the Sensex rallying to 21,000 by the end of this year.

"One needn't worry about the downside risks at current levels especially when the liquidity flow is expected to be healthy. The markets are being currently driven by global risk appetite." He says adding that the fears of a double-dip and risk aversion are overdone. But this does not suggest that we are headed for a secular bull market, he quickly adds.

Having short positions at the index level, but overall 90% long, Sama remains bullish on the IT services growth given the West's focus on cost cutting.

On his preferred stock and sector picks, he says though he is positive on auto and capital goods sector, the financial space doesn't impress him much.

Below is a verbatim transcript. Also watch the accompanying videos.

Q: We have touched 5,500, can we climb higher?

A: Yes. We feel pretty good about the markets. We are more constructive than we have been in the last few months. Let us talk briefly about the global picture which you have got going on in the markets over the last year even two years at this point is too massive counter veiling forces at work.

One is, fear of inflation and we are headed for a massive inflationary spiral. The other scenario is people are much more concerned about is deflation and specifically the risk of a double dip recession. Our view is somewhere in the middle. We think that fears on either extreme or overdone and the way we played these markets including India, is when fears get overdone toward one extreme or the other, it is time to buy. We see today as a buying opportunity.

If you look at March 2009, which we could agree is probably the depth in terms of fear at the depth of the financial crisis. You look at the bond markets. Ten year treasury is 2.5% that is where we are today. You look at trading volumes in the equity markets. They are down to the same levels.

To a degree, US investors really run away from the equity markets. You might say equity markets are a lot higher, but not in price to earnings (PE) terms. You are back around the 12 times forward PE levels. We think things have probably gone a little bit too far in terms of fears of the double dip, deflation etc.

There is a lot of liquidity in the sidelines. You are seeing that reflected in the Indian markets over the last two weeks. So we feel pretty good about the prospects of a playable rally over the next few months - globally and specifically in India.

Q: So when you look out six months from here, you feel confident that a market like ours will probably be trading at much higher levels that we got going right now?

A: I do not know about six months, because of the two very powerful extreme forces. There is a lot of volatility out there. I do not know I would go as far as six months. We have positioned ourselves on the assumption that there is a possibility we trade up to 21,000 on the Sensex by year-end. We think there is some life in this rally.

Q: You spoke about low volumes. That is true for the US and for India, but there has been no dearth of flows. You have seen some USD 3 billion over the last couple of months into India. Do you see that force of liquidity continuing into emerging markets and India specifically?

A: I do. The fundamentals of India are rock solid and the pendulum in terms of the investment climate with the whole India versus China debate is a little bit overdone. Relatively speaking India has a great story to tell. From a growth perspective we see it outpacing China over the next five years certainly. A lot of people are focused on that.

The only thing going against that is that there are all types of investors out there. If you are value oriented obviously India is not where you would look. There are cheaper markets out there. Russia is a notable one. If it is stable and reliable growth you are looking for, India is a good bet. People see that. We do think the liquidity flows into India look pretty healthy.

The numbers for the August month to date is fairly substantial. It is to the order of USD 1.5 billion and on Tuesday alone you had USD 100 million. Flows are pretty healthy and likely to be the case over the next few months. Risk appetite is a little bit from where we are coming being relatively bullish in the market.

Q: In that case how worried or wary are you of the downside risk for this market?

A: Not too worried. Again what is driving these markets is global risk appetite. As I went through, the pendulum has shifted perhaps a little bit too far in terms of fear. I am not too worried about downside. Even if it is not withstanding, we are not too worried about downside at these levels.

Q: It has been a tougher market to invest in though. It has been so bottomed up. It is about individual stocks making 52 week highs rather than the market. How have you positioned yourselves in that context?

A: That's fair. From our perspective, taking a directional view has been quite important. We are in range trading markets. We are not in a secular, bull or bear market. That is important from a sectoral perspective how you position yourself is key to right now.

We have gone over last three months from being a 70% to 90% long. Our sectoral bets are IT services. We think that sector has some legs given the focus on cost cutting in the western world. There is still some room to go there.

The auto sector is a great story. If you want to make a case in the Indian economy decoupling that is one sector you would look to. A 40% year on year growth in July and order sale is pretty remarkable, pretty unique. We are still positioned in the auto sector, capital goods, given again a secular trend towards the infrastructure spending.

The L&Ts of the world are three sectors where we have placed our chips. There are other sectors where given the potential for the likelihood of rising rates that were not bullish on as we might have been in the past, our financials, our banks in particular. Sector rotation is quite important.

Q: This last one year we had a ranging kind of market with a gradual grind up and it has been very-very bottom up. If this is a good bull market fueled by liquidity and good risk appetite, then at some point it will become a momentum market as well. Do you see us in the next few months reaching those kind of bubble proportions where valuations expand to 20 times plus? Money chases stocks, everybody gets sucked in, retail which has been sitting out that kind of a mood and ambience that was there around to end of 2007 and can it come back?

A: I really don't think so. You got not one but two doom day scenarios out there and there is a lot to worry about in the western world. I do not think you are going to get to the point of which people throw caution to the winds and ride in.

What we are talking about is much more a short to medium term trading call. We think that fears of a double dip are overdone. Investors have probably gone a little bit too far in terms of risk aversion. We think that India will be a beneficiary of return to risk appetite, less risk aversion over the next few weeks and months.

For complete interview details watch the accompanying videos.