IIFL Cap sees further rally driven by rate cut, reforms

In interview to CNBC-TV18 he said, "We have crossed the worst in terms of sentiment. News flow should continue to remain positive and that should drive the market."

However, there are still come concerns that are overhanging. Pandey warns that political stability and reform execution are the key risks. He is also not looking for any significant positive surprises from the second quarter earnings.

As an investment strategy, Pandey advises staying away from telecom till policy certainty emerges. He feels banks are the best bet to play macro recovery.

Below is the verbatim transcript of the interview

Q: Do you see more upside to this market over the next few months?

A: I see more upside to the market in the next few months considering that we are talking about a rate cut, hopefully by the month end. We are talking about further reform measures being announced and more substantial reform measures in terms of investment activity etc. I guess we have crossed the worst in terms of sentiment. News flow should continue to remain positive and that should drive the market.

Q: What is your expectation from the earnings season this time?

A: Earning season will remain sedate like Q1 this year. But a lot of that is discounted; if you look at consensus estimates, analysts are talking about 10-12 per cent kind of earnings growth in Sensex companies. In the broader market, there will be pressure on margins across the board and topline growth will also remain sluggish. Earnings season will not have anything to cheer about but what matters is how earnings look like going ahead. We have seen the worst over there in terms of downgrades over the last few quarters.

Q: Given that the policy risk seems to have abated quite a bit and the market has priced in some degree of positive news flow coming in from New Delhi, what is your sense of the key risks that lies ahead for the market from hereon?

A: The number one risk for me would be in terms of political stability and the ability to push through some of these reforms through the parliament. Reforms like increased limits for insurance etc need to go through parliament, and there, how the government manoeuvres that, is very crucial. This will send strong signals for future reforms, so political stability and ability to push through these reforms is critical. The second risk is the external environment is still not safe in terms of Europe situation. While there are the short-term measures in terms of injecting liquidity and buying bonds to support or to lower down the borrowing cost for these troubled economies, longer term problems will continue.

But short-term risks have been taken away and that’s why investors have been very bullish across the globe. The third risk is in terms of inflation; we have seen diesel price hike, food prices have been high and one is building in some moderation and inflation going into Q3 and Q4. If that doesn’t happen, there is limited scope for the central bank to reduce rates. A rate cut is becoming more and more essential now going ahead to review investment activity and to boost sentiments. These are three external risks which I see and we need a bit of luck to sail through these.

Q: Is this a good entry point for participants who could not make the most of the September rally?

A: The run up has been very steep undoubtedly. The stock prices have run up a lot, some of the higher beta names have run up 40-50 per cent. There is always a possibility of a pullback, consolidation, and for a short-term, there is a possibility of a correction. Some stocks do look overpriced; there are a lot of hopes getting build in some cases. So yes, possibly the market should take a breather and then resume its journey upwards again.