Global risk aversion may hamper India: PN Vijay

In an interview to CNBC-TV18, PN Vijay, Portfolio Manager said that global risk aversion may hamper India. "The risk aversion in the global environment is increasing and how long is India going to get the flows. Here the economic story is good, but it’s surely a possibility, that if we breakdown at some point in time like Shanghai or Nikkei did, we could get into pretty serious stuff here," Vijay elaborates.

However on an optimistic note he said that there are still chances of FII flows to India, as it looks attractive with 9% economic growth. According to him, the other good thing in India is the amazing retail participation.  

Some of his best picks are Lupin , Opto Circuits  and UCO Bank .

Here is the verbatim transcript of his interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Are you getting worried about the global environment again or do you think we can standout?

A: I am surely getting worried. The American economy seems to be getting from bad to worse. In Japan, the Nikkei hit a 15 month low a couple of days ago. The G8 nations are surely facing a severe question mark on the economic recovery. Anecdotally of course, one is told that nine times out of 10, when recessions have been followed by recovery, there has been a period of six-nine months, when the recovery has been very bumpy, due to the removal of government incentives and we are probably passing through a textbook case of that.

The question however is the risk aversion in the global environment is increasing and how long is India going to get the flows. Here the economic story is good, but it’s surely a possibility, that if we breakdown at some point in time like Shanghai or Nikkei did, we could get into pretty serious stuff here.

Q: In a perverse way, does it still continue to help us? The fact that others aren’t as strong as we are, the fact that commodities have not moved too much and crude has been more or less static?

A: Yes, it’s amazing. If you look at the Indian market and look at other charts, you have decoupling of a major order. The interest rate globally which is almost non-existence- between 0-3%, and there is huge amount of money sloshing around there. It has to get passed somewhere. How long can you buy Japanese Government Bonds (JGBs) and US bills?

That is why we are seeing incremental flow and one cannot see any obvious reason why people will not come to a country with 9% economic growth and going so strong demographically. Another good thing is that the retail activity is amazing. We get a bit lost in the Nifty and the non-performance of your ONGC ’s and Reliance ’s of the world, but there are 100’s of stocks which are amazing.

Over the last two months, what is happening, you could pickup a Lupin or Opto Circuits or UCO Bank . There are 100s of them which are all going up, which means the retail participation is there. These are some of the good signs, but we saw in 2008, when there is a meltdown things can be quite a tsunami.

Q: What do you reckon though in the short-term have we hit a ceiling with 5,500 or will any move up be a very tired one?

A: I don’t think this market is going too much in the upside, unless we get some good data from the US. In Japan, people have sort of writing it off for a while. Europe is okay as it is neither plus nor minus.

The US in July, had the removal of the government’s incentives for housing which had a disastrous effect, but we need something good. The Dow has to find some sort of stability, and then it can take off. We are going to wait a while before that happens at least a month or so. It could be a stock pickers market, but my sense is that it will be safer if one had bit more of cash in the portfolios.

Q: What do you do with the banks now? They had a great run. They have started correcting in the last three-four days. Do you see this correction as an opportunity or do you think it may now unwind some more given its recent out performance?

A: If one had to pick some profits off the table and go into cash, banks and auto represent two perfect sectors. In banks, you have seen that 50-60% rise in the last four months. One is tempted to take it away. I do feel in the next one year, banking is one of the three-four industries in this country, which are totally insulated from global chaos directly or indirectly.

People tend to mix metals with banking and auto, I don’t agree. Banking is one sector which has got a very strong correlation with India’s gross domestic product (GDP). Banks do remain a good haven in this market. I wouldn’t be surprised if people in a bit of risk aversion, especially the foreign institutional investors (FIIs) and the domestic institutions, pick some profits off the table right from State Bank of India (SBI) downwards.

Q: What is your general view for the next two-three months? A lot of people have been waiting for a dip to buy. Do you think in the next couple of months its conceivable that the Nifty will give you a dip to 5,000-5,100 levels and that may get in that opportunity for a lot of people, who have got cash and are waiting on the side lines?

A: Possible. I wouldn’t probably reckon the levels which you suggested, probably 5,200 or so. Another 5-7% could be possible even if we got a bit more coupled with global markets. If one sees the last six months charts on the Nifty against other indices, we are really basking in the glory of domestic economic growth. If that stops for some reason, we could get that 5-7% correction and surely one should be fine because the India story is still very strong globally.

Q: I think its politics more than anything else that is driving this situation. Would you play this counter offer story on Cairn ?

A: I doubt that. I think there is a lot of talk about it. My own sense is that in India we are getting used to bigger and bigger roles for private sector, definitely in petroleum products. May not be in mining as we saw yesterday on Vedanta, but I don’t buy that. For me Cairn is no longer an interesting stock.

Q: What do you do with metal and mining sector? It is not just local. There are global rumblings as well on something going wrong with this entire space?

A: It is right now the riskiest sector. As a portfolio manager, I have to balance it all the time and when I do that, I may get that pop up but the risks are so high in investing further money into metal, that we have downsized severely on metals in the last 40 days and we are continuing to do so. We do have one or two blue-chips but otherwise we are quite negative right now on metals.