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Portfolio Manager PN Vijay said the major worry for the market is how quickly inflation can get tamed. He told CNBC-TV18 that as long as inflation remains in double digits, nobody will have the risk appetite to go and buy stocks. He added that once inflation comes back to 6-7% levels, liquidity will return to the markets.

 

Excerpts from CNBC-TV18's exclusive interview with PN Vijay:

 

Q: What did you make of the RBI action we had and how the markets might perform in that light over the next few weeks?

 

A: One could sense that some action from the RBI was coming, because we had the RBI Governor meeting the Finance Minister on Sunday, followed by a strong statement by the Chief Economic Advisor.

 

After that, we saw pretty hefty action in terms of repo and CRR because RBI has been accused of being too tardy and reactive.

 

RBI's move has been welcomed by financial circles, though the industry is a bit dismayed. For example- what we saw yesterday afternoon was probably a leak of the rate hike. The market has probably mostly discounted this hike.

 

Q: What do you expect this market to do in the next few weeks? Do you expect it to hold? Do we have to brace ourselves for some more weakness?

 

A: The economy is driving the markets. There is a school which is giving a thumbs down on the economy. It is the JP Morgan, Morgan Stanley and HSBC's of the world, who have written down the Indian growth rate to less than 8% or between 7% and 8%. That has influenced the FIIs' decision-making and they have been big sellers since the last 3-4 months.

 

On the other hand, we have the local thinktanks like CMIE sticking to an 8.5% growth rate. There is the Chairman of the Planning Commission Montek Singh talking about 9% GDP growth and the Finance Minister reiterating 8.5%. RBI is a bit more guarded at 8-8.5%. So, the local thinktanks are a lot more optimistic.

 

So far the FIIs are doing such heavy selling that negativism has been substantially discounted, give or take another 2-3%. But by the second or third week of July, when the base effect of inflation goes away and we come to about 8% or 8.5% growth, we should see some more brightness in the markets.  

 

Q: What you do with the banks now?

 

A: Banks are at the eye of the storm as they always should be. Even in Wall Street, when the financial markets were in trouble, the banks were getting it. In India,a couple of things are happening on banks.

 

The results have been very strong, even for the last quarter and that is a positive. After that, we have had the CRR and the repo hikes, which are obviously very negative for banks. Thirdly, they have fallen through the floor and lost about 30-40% in value. If you are a long-term investor, you will start buying some time, see the impact of the rate hikes they would be doing and try to make an analysis of the future profitability.

 

The price to book is excellent and the PE ratios are fantastic. But you have to convince yourself that the growth is sustainable and then pick this sector. This definitely gives you an entry opportunity. But we need to see exactly when.

 

Q: We have gone through most of this year fighting almost everything that could fall upon the market's back. What is your sense? Is this truly the best time to go stock picking? Would you just keep a great degree of cash right now and sit out this rough phase?

 

A: It is always very tempting to just pick the bottom. The market has really gone down tremendously for the right reasons. In January, we were overvalued at 6,100 on Nifty. We were the most expensive emerging markets. So, we had to lose value.

 

Then we had inflation interest rate concerns and so growth rates were being turned down a bit. So, we lost value.

 

At this stage, the markets have become valuable. If you see last ten days, the buying is coming in Reliance, BHELs and Punj Lloyds of the world. So more and more people are thinking that the old economy stocks still do represent value. If I were having about Rs 100 in my basket, I would invest up to Rs 20-25 in the next one week. 

 

Q: How carefully are you watching the political situation because the nuclear standoff is still playing out? How big a problem or deal do you think it is for the market right now?

 

A: If the political logjam results in a breakdown between the United Progressive Alliance (UPA) and its Left allies, the market will lose probably 5-10% in the next few days because we will have a hiatus for the next five-six months. The market does not like a hiatus of that nature; there is total absence of decision-making at a crucial time in the economy.

 

But my sense is that some face saving formula will be devised and I do not think this is going to disturb the market in the next few days.    

 

Q: What about technology?

 

A: Technology is an oasis because since last reported the rupee has depreciated from about 39.50 levels to about 48.75 levels. So, they get a clear whammy there. There is no serious problem and they have on order inflow. The big size orders are all coming in. So, on the ground they are not facing any other problem of higher interest rates and high inflation.

 

Technology and to some extent pharma have been such out performers in this bad market, that people who now want to get into some basement buying in the old economy blue chips are booking some profits in those and entering.

 

We are also doing the same because we have seen nice profits in those two segments. We are saying why not cheery pick some of that and go into some beaten down economy stocks.

 

Q: Telecom has got a lease of life. What did you make of the Idea - Spice deal?

 

A: That was coming because it was generally known in the market that Spice was looking for suitors. Idea has been really desperate to increase its footprint based on the way Bharti has taken off, BSNL is enlarging, Vodafone took over Hutch, etc. So, Idea had to do something.

 

But they have a long call to catch up because in this industry globally there are a maximum of 3-4 players and they are the sixth player now. So, they have a job cut out for them.

 

Q: What happens to a couple of other sectors that were seen as the safer havens like FMCG ?

 

A: It is an interesting sector. I am quite positive about it. FMCG would give you a very steady and nice growth trajectory in the next 24 months.

 

Q: What are your thoughts on the metal space? Are you worried about the RBI action, that it might be followed by some kind of price action on the fiscal front?

 

A: Definitely no. Whatever the fiscal action the government took, in terms of oil prices and before that in metal prices is done. They already are under a lot of pressure from the World Trade Organization (WTO) on agriculture.

 

So, the fiscal action is over and monetary action is done for sometime. The money managers in the country will watch what is happening. We are not going to get that type of headlines in next few weeks. 

 

Q: The stock that really hit the sentiment a few days back was Reliance and the way it got so close to Rs 2,000 and even cracked it at one point. What would you do with that stock now?

 

A: We have Reliance in all our portfolios. It has taken a very severe hit and is a stock that follows or precedes the market. At Rs 2,000, the market has practically discounted many things. The positive for them is the big oil find which is going to get commercialized in the next one year in the KG Basin and the retail rollout plan. So, there are a lot of good things there but right now.

 

For people who are having a 6-month timespan, it is one of the best old economy stocks to pick.

 

Q: We are stepping closer into the earning season. Would that be your prime worry for the markets now and the prime mover of performance?

 

A: Perhaps not, because the earnings are going to be slightly muted and not too much. The big worry for the market is how quickly can inflation get tamed. That is the million-dollar question and as long as inflation remains in double-digits nobody will have the risk appetite to go and buy stocks.

 

Once inflation comes back to 6-7% levels, there will be a lot of liquidity returning to the markets.

 

Q: From an investor's perspective, would you still advice people to sell out when they are still in the money because the market looks poised to see greater lows? When would you begin your cherry-picking? Would it be when you see the first signs of inflation picking off?

 

A: I never ask my investors to sell out. I believe in the India growth story too much to do that. I may advise them to cut positions and go more into cash but not sell out India for the next ten years at least.

 

Well, the macroeconomics is clearly rolling the market and it has turned a bit adverse for India. The million-dollar question is how long will it go on?

 

We should close 2008-09 at a 6% inflation rate and 8% growth rate with 14% nominal growth. This means that at some point in time, including the base effect, we should get back to 6-7% and then go on to 6% and then to 5% probably towards the end of the year.

 

With that economic model to work on, it is a question of picking stocks. We are slowly picking stocks where we feel it is beaten down a bit too much. That will give us rich dividends in the next one year.

 

Disclosure:

 

I may have discussed stocks/sectors in which I have positions through our portfolio management or proprietary accounts.