See chances of mkt crossing intermediate range: Brics Sec

Q: Everybody has started watching the Dollar Index every morning. Do you think it is the pivotal one for near-term direction for the market? If that remains weak then equities are fine and if it strengthens, equities will sell off.
A: There again is a long-term kind of bottom. However, I would imagine it to go further down with some pullbacks along the way. So, near-term equity will be determined by the Dollar Index. In the longer-term the fight is again between two conflicting trends. The US wants to devalue its currency since it is the simplest way of taking care of international debt obligation. At the same time, if one looks at what has happened in both China and India over the last 18 months, both seemed to have more or less pegged their currency to the dollar. If you look at it in terms of gold, since the beginning of this year dollar is down 23%, China is down 23% in terms of currency and India is down 20% in terms of currency. Therefore, more or less we have tracked the US dollar.

This effectively means that you cannot use exchange rate policy to determine how your economy will do and that may lead to some kind of protectionism by both Europe as well as US. We are beginning to see some signs of it. Some policy efforts being made in that direction but I would not be surprised if you start seeing some kind of penalty being imposed on imports from India or China services tax is something we have seen in papers today for IT services and so on. I think some of those steps will actually start to come out to the detriment of everybody in the trading world.

Q: If your view is that there could be upside determine by liquidity in the near-term, how do you play this tactically? Do you just play along with the anti-dollar clusters like commodities which are high beta but you are playing it from a trading perspective or would you want a slightly more defensive tilt to your portfolio if you are invested at this point from a tactical perspective?

A: Tactically you have to broaden your universe because whenever the market becomes reasonably steady, investors move out of more liquid stocks into less liquid ones because you are paying the illiquidity premium in the expectation that you will pay a catch-up from the valuation. By and large, outside the index, the companies tend to be cheaper to perhaps faster growing because they are somewhat smaller. So I would not be surprise if you continue to see the broad market doing quite well and some of those companies actually forming more and more part of the portfolio.

The only hesitance that most fund managers today would have is that they have done that one before and not too back therefore the memories of being beaten off after a crash like that is quite fresh. However, I would still imagine that you would see some movement out otherwise you would continue to look for themes where you can expect to see slight longer-term growth. This is why there is love for themes like infrastructure and so on which is obviously the best opportunity in India. If you have low interest rate, it is a best time to actually invest in infrastructure which otherwise is a low return on equity (RoE) kind of business.

Q: What do you do with the whole auto complex right now? Fairly interesting moves have happened over the last few days. The commercial vehicle (CV) stocks have started doing much better than some of the car and two wheeler plays. What is your preferred zone here?

A: There aren't too many CV manufacturers that you can look at buying because the largest obviously is loaded up with the debt. The assumption that road construction will start again will obviously lead to a huge up cycle in commercial vehicle (CV). If you go back to what happened last time around, there was a time when Tata Motors had guided for annual growth which materialised in the first six months. This was about four-five years ago and it was largely driven because we did not have a history of having large number of roads build. If you look at some of the plans, the government has an anvil right now for example the dedicated freight corridor. Our estimates are that in spite of the fact that freight corridor is 1,000 km or more, you will have almost an equivalent amount of kilometres of road, which will be needed to build as feeder lanes. Obviously the feeder lanes will largely require CV and so on. So the kind of multiplier effect on CV demand to road building is quite phenomenal.

Consumer demand has been quite robust and you would expect a bit of easing off from two accounts- one that stocks have run up and two because we expect that post Diwali, there will be a slight slowdown in the overall demand. There is also fear of new competition because more or less all segments of the car market are now going to be looking at new models getting introduced as well as new manufacturers coming in. Both of it are likely to be write some bit of re-margins for exiting players.        

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