Dip in buyer demand, policy action risk to mkt: Sampriti

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Sandeep J Shah, chief executive officer of Sampriti Capital spoke to CNBC-TV18 about where he thinks this market is headed. "At 4500, there were no bulls on the street and now that the markets have rallied, most of the bears seem to have disappeared," he observes.

According to him, this is a market which is driven on animal spirits which is liquidity. "These kinds of markets can actually go higher than a rational level for the market to be in, given the state of fundamentals," Shah says.

"If consumer growth begins to falter, then you might see that it was just a blip and you might see data go back again," he warns. Shah sees our bureaucracy slowing with policy action, and that could be a risk, he says.

He believes that a sell-off below 5,000 is still conceivable, but we might not get back to that 4,400-4,600 levels. "We might perhaps get back to maybe 4,600 to 4,800 levels, but there are a lot of ifs and buts to it."

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

Q: It's been a terrific few weeks for the market. Do you think we have slipped into a bull market or would you take profits here?

A: The last time I was on this show I had repeated my market call of 4400 to 4600 and that that would be a level to buy, and we went to 4530 and we have bounced back very nicely. Of course, the market corrected about 28% from the peak which is very close to the 30% correction that I was looking for. It was interesting that at that point of time when we hit 4500, I couldn't find any bulls on the street and now that the markets have rallied most of the bears seem to have disappeared but I still think that there are quite a few skeptics left.

So if you were to broadly look at what's really happening, in the US, we have seen that money supply is actually been going up. What you are really having globally is a relief rally which is liquidity driven. In the US there is relief that the economic data is much better than what was expected. US money supply is going up. If you look at Europe, there is relief that the pumping of liquidity by the ECB where the balance sheet has gone up by 40% in the last six months to USD 2.8 trillion, is actually abetting the insolvency issue. In India, there is a bit of relief that the quarterly results haven't been as bad as was expected. The results are still not good by any stretch of imagination, but expectations had become so low that the results have been marginally better. There are some bankers who feel that the numbers we have seen may not accurately represent the truth....

This is a market which is driven on animal spirits which is liquidity. So these kinds of markets can actually go higher than perhaps what you might think is a sensible place or a rational level for the market to be in given the state of fundamentals. Of course, we have seen PMI numbers across the world seem to be fairly good whether it's India or in the US, the eurozone as well. In fact, in the eurozone, the composite PMI which is manufacturing and services, it's above 50 which show expansion! Of course, manufacturing is still contracting.

However, if you were to take a closer look at some of the US numbers, for example the last quarter GDP numbers which came, out of the 2.8% GDP growth, almost 2% was perhaps because of restocking. So the question that we have got to ask ourselves is whether the consumer demand will sustain? If consumer demand sustains, then in spite of the restocking, you will still see growth. But if consumer growth actually falters, then you might see that it was just a blip and you might see data go back again. So that's one caveat that I would like to highlight.

The second thing is that in India there are expectations now given where markets are that the government will act, if not on policy, then at least ensure that your projects are clear, decisions are taken. But some of the events that have happened last week might actually make the bureaucracy even slower than they have been, and I am just highlighting that as a risk.

In terms of the upside, somewhere above 5400, it might make sense to raise a bit of cash, but you don't want to get off the roller-coaster ride unless you are sure that the market is going to start correcting. That would be the broad view.

Q: What kind of range do you think the market could be pitting for in the near-term? If you see more upside potential beyond 5,400, what do you think we could get to and what kind of floor do you think the market has in place now?

A: From a safety perspective it might always make sense to rise a little bit of cash above 5,400 levels. That's simply from a risk-management perspective, given that it's all flow-driven ETF money, and ETF money can turn on a dime.

On the downside, if you have to draw a curve of the policy paralysis, we probably have hit bottom. My base case assumption is that the market does act, but a little slower than what the market expects, the government does better than what they have done in the last year or two, but still fall short of expectations. In that sense, there is a risk that the government might be disappointed by the budget, no matter what happens to the UP elections, of course, on the other hand, the elections are good, then we have a great budget and then you could see a spike. But the risk is also that the government might disappoint given that there isn't much room to maneuver for the government.

So unless and until you find a political realignment to forces and we find that it's not Mamata Banerjee who is supporting the UPA but maybe the Samajwadi Party....  The underlying premise here is that there is some movement, but it's not enough for the markets to be happy.

I think the floor might perhaps be closer to... a selloff below 5,000 is still conceivable in that environment, but we might not get back to that 4,400-4,600 levels, perhaps get back to maybe 4,600 to 4,800 levels. There are, however, lot of events which you want to actually see how they pan out before you can say that is it going to be 4,800-5,000 or 4,600-4,800.

Q: The biggest rallies have come through in the capital goods albeit numbers have not been equally good or equally bad for that sector. What would you buy from capital goods now?

A: I think it makes sense to stay underweight on capital goods. Stocks that you might still want to avoid would include BHEL and few other companies. For example in BHEL, order inflows are down 60%. On what basis can you make fundamental case for buying a stock where orders are down so much? Looking at pure PE ratios don't make any sense because there was a time when BHEL used to trade for years between four-nine times PE.

On the other hand, perhaps the only company that seems to have done well in this environment is L&T , where if you look at the first nine months, order inflow growth is still up 20%. Remember that their order inflow guidance for the full year is still just about 5% growth, and there are still questions as to whether they will be able to achieve that. If you have to buy something in this space the only reason why you want to look at L&T is because they have such a diversified order book, it's obviously a great company, and it's a kind of company which is able to come up with new initiatives to match the environment and come up with new strategies whether its new geographies or new products or new segments to focus on. However, even in the case of L&T, there is a risk of disappointment because if the management guidance is 5% order inflow growth and they meet that guidance, it will still be significantly lower than what we have seen for the first nine months so even. If you want to buy L&T I think you got to wait for some bad news here before you get into a stock like that because there is a risk of serious disappointment.

Just because the market has gone up and we have seen some signs of green shoots, it doesn't mean that the order books of these companies are bulging and they are seeing great orders and execution is happening. Of course there is also big risk that this liquidity-fuelled global rally in risk assets, if it doesn't lead into credit growth which means that banks don't start giving money and companies don't start investing and consumers don't start borrowing, there is a risk that it remains just a boom in commodities which has its own negative repercussion. So the short answer to your question is L&T, but on a correction.

Q: Would you worry about crude at all which is touching USD 115 per bbl or do you think its one of those phases where liquidity is taking everything up and markets are more focused on liquidity rather than what it is happening to commodity prices?

A: Crude is obviously a concern, but we have seen this level of crude during all of last year. Crude hasn't yet hit a level where it would start ringing alarm bells, but for me, it's definitely something to watch carefully because globally, liquidity-fuelled rally and some signs of recovery and still issues happening in the Middle East and there are still concerns between Iran and US. So crude is something that I would definitely keep my eyes focused on, but the current price of crude is not something that we haven't seen. So what would start worrying the market is if crude were to spike to USD 130-140 per bbl, I hope it doesn't, but that is where the alarm bells would start ringing real hard.

Q: Hindustan Unilever 's numbers today, what would you expect from that stock?

A: Hindustan Unilever is a stock that we have been bullish since Rs 240-260 levels. I think there is a growing view, and of course, it is fuelled by what has happened in the last 1.5 months that you switch out of defensives and you get into cyclical and the interest rate sensitive and so forth. But if you are a portfolio manager or if you are constructing a portfolio for the long-term, it's not an either/or situation; it's not that you have only cyclical or you have only what you call so-called defensives; you end up having a mix of both.

Hindustan Unilever is something that has just broken out from its decade long Rip-Van-Winkle sleep so to that extent, I think the growth and the consumer boom in India is here to stay. Whether we see 6% GDP growth or 8% GDP growth I think incrementally it is going to be the Indian consumer who is going to lead growth. So from that perspective, there is a risk that Hindustan Unilever quarterly results margins could get affected because of the rupee depreciation, and there are some incremental growing concerns that on the rural side also there is some slowdown. So if the stock were to correct on perhaps what the market perceives as numbers below expectations, then I think that would be an opportunity to nibble into the stock.