FIIs awaiting May 7 to make a move, says Kotak Mah Bank

Below is an edited transcript of Jayaram’s interview on CNBC-TV18. Also watch the attached video. 

Q: For the past two months we have been holding onto this range of 5150 to about 5400. Even when you have good news or whether you have got some bad news, where do you see the equity markets headed from hereon?

A: While we have had this range for a fair period of time, I can’t envisage the market breaking out of this range in the distant future. Clearly, while we have had some suggestions that you could have some positives, particularly with respect to the announcements in the Budget, with respect to GAAR, if they are positive in any sense, you could get some fillip there and you have seen probably some early signs of reforms.

On the flip side, you have had the fiscal deficit, which continues to worry. No signs of fuel prices being passed through etc. There are enough set of problems on the negative side to keep some of these positives counter balanced. In that sense, I can’t see the market breaking out of this range fairly quickly.

Q: We saw some good some good set of numbers that came in from ICICI Bank today and in general private banks have had a strong showing. Do you think this space is worth accumulating into now or do you think the valuation hurdle or the overall economic downturn will sort of mar the uptrend from here?

A: Across the board, as we look at sectors, we clearly like financials as a sector because we believe that it’s got beaten down a fair amount on the back of a lot of concerns particularly with respect to NPLs etc. Some of them, obviously, were overplayed a little bit. To that extent, if the economy improves from here, I think the clear benefit will be for financials.

Within the financial space, between PSU banks and private banks, while PSU banks offer better valuations, I think the issues around transparency of balance sheets, NPLs etc is much larger in that space than in the private banking space. I think most investors, particularly global investors, seem to prefer the private banking space as against the PSU space right now.

Q: From hereon, how do you expect the flows to pan out into the Indian equity markets? Is there a possibility we could see outflows from the FIIs?

A: Obviously, April has been a huge disappointment in terms of flows. But clearly the primary driver has been the uncertainty around GAAR and I think there has been enough discussion on this, including in the US, when the Finance Minister was there. I think most of the foreign investors we speak to are currently on the sidelines because there is still some element of confusion as to how this will finally play out.

I think by May 7, which is when the budget is expected to be passed, one will have clarity on that that whether you will have GAAR probably being postponed by a few months or even by a year. It's only after that that many of the foreign investors; the bulk of them who actually route their funds through Mauritius will actually take a call on how to sort of take this whole investment into India forward. So I think you will continue to see fairly insignificant sort of flows.

Having said that, I don't expect any significant outflows as well because right now they (FIIs) are sitting on the sidelines. It’s only post May 7 that you will start to see some clarity.

Q: How do autos look at current levels? Of late we have seen a lot of interest in most of these auto companies?

A: I think couple of things. One obviously is how this interest rate issue sort of plays out. I think expectations at one point of time where that interest rate would probably come down a little sharper and to that extent it would sort of certainly boost auto sales because a lot of its done through the financing route. I am not so sure that's actually going to play out that way because currently interest rates have sort come off very marginally and given current market conditions it's unlikely that there will any sort of significant change in that over the next few months.

Added to that overall if the growth is sort of going to slow down a little bit from here, I am not necessarily very positive about this space because clearly autos is a lead indicator and if we are going to see a slowdown in the economy it will probably hit autos before it hits a lot of other businesses.