Dalton Cap expects market to do well in H2 of the year

Bhat says the market may correct if the government fails to deliver post the presidential elections. Brokers said market mood was partly dampened as global slowdown and deceleration in manufacturing pulled down India's May exports by 4.16% to USD 25.68 billion.

However, Bhat says market performance will be better if reforms are undertaken in the second half of the year.

Meanwhile, the rupee opened stronger for the fourth straight session on Tuesday buoyed by positive investor sentiments on hopes long-stalled reforms will pick up pace after recent clarifications on retrospective tax.

According to Bhat, containing the Balance of Payment (BoP) deficit will be key to arresting the rupee's fall.

Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.

Q: It has been a pretty sharp rally courtesy what has happened on global events? Would you give this more or do you think this rally has played out?

A: It depends on the hopes of some policy momentum playing out in India because what is expected is with this sort of new finance ministry team; a lot is expected in terms of policy momentum. All that hope needs to be delivered on. In Europe, there was hardly any expectation from the European heads of state meeting and what was delivered was dramatically better than expectations.

Therefore, there has been a big move there in terms of risk-on trades. That has more or less affected sentiment in India also. But finally it depends on what happens in India in terms of policy momentum. So that is something that we need to watch very closely.

Q: Where do you think this upside for the market could be capped, is this a market that looks like it could get all the way to 5,600 or not quite?

A: It all depends on policy momentum. For example, if there is oil decontrol or if there is something to suggest that there is a lot of movement on policy momentum in terms of the red tape being cut in the power sector for example, all these things can certainly take it to 5,600 but what most people know is what are the three-four things that need to be done in order to satisfy the market, in order to press ahead with growth but there needs to be some political cover for those who are required to do this.

That is what is probably lacking. Once there are some movements forward, probably, post the presidential election that is a possibility. There should be some more momentum from Europe in terms of solving the problems especially concerning Spain and whatever little they have done in terms of common supervision of the banking system in Europe, that needs some more substance in terms of the stability mechanism getting more muscle because the amount they have is not good enough for them to tackle the issues at hand and there could be something like an LTRO coming in.

Q: Would you say 5,600 looks doable with a higher base as well? How would you work in terms of markers for the market now?

A: It all depends on events that are going to unfold in India probably post the presidential election but if the hopes are belied then it could probably trace back to the lows of last month. But there has already been an 8% dollar movement last month that is something that carries a lot of hope and that needs to be delivered on.

Q: How worried are you about the newsflow that has been coming through on the monsoons? It is beginning to hit that panic status in terms of the trends, the performance and the impact. Do you think that is going to be a big make or break through July?

A: I think that would be because probably two-three weeks from now, you will know exactly that there is some amount of make-up for the shortfall that has happened in the last few weeks and the potential impact that it can have on a rural consumption and generally the gross domestic product (GDP) growth.

This is something that we need to watch very closely as it has probably escaped attention with the run that we have seen over the last one month but this will probably come back to haunt us over the next few weeks.

Q: Would you then advise churning of your portfolio from some of these expensive defensives like FMCG and move to some of the rate beneficiaries like infra or real estate?

A: If the government comes out with some movement on the policy front, the biggest beneficiary should be infrastructure because that is where most of our investments are stuck and that is where the outlook on investments seems to be very bad.

Typically, entrepreneurs are not having confidence to invest further. Say for example if they do something in the power sector, recasting the finances of the power sector especially the state public utilities, these are things that can give a huge fillip to the infrastructure sector. Therefore, it is certainly worth a trade.