Alroy Lobo, chief strategist & global head at Kotak AMC expects liquidity conditions to remain fairly buoyant after the European Central Bank's second offering of three-year funds on Wednesday.
According to Lobo, the inflow into risky assets is likely to continue ahead. “My sense is that the LTRO would continue and there is also expectation that you could see some amount of quantitative easing also emerging from the US. So global liquidity, in my opinion, will be strong in 2012,” he told CNBC-TV18.
For India, Lobo says domestic triggers will determine if we continue to rally or not. “The outcome of the UP elections will have a bearing at the Centre and will be the most important trigger in March,” he stated adding, “election impact to last in the market for 2-3 weeks.”
However, he said, analysis shows economic parameters are bottoming out. “The GDP likely to have bottomed out in December quarter,” he said.
The main risk to the economy remains the high crude oil prices, Lobo said.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.
Q: It has been a terrific liquidity phase for the market. After LTRO 2 last night, are you confident that this kind of liquidity will continue?
A: I think the liquidity will continue going forward. It appears that even if you look at LTRO 1 and LTRO 2, there seems to be still some gap that the European banks need to fill up to meet their debt obligations, repayment obligations for 2012. What the market will be definitely looking forward to is over and above these debt repayment obligations, what is the excess LTRO that is available to push into the real economy.
However, some of that money would actually start reaching riskier asset classes like equities and particularly in emerging markets. My sense is that the LTRO would continue and there is expectation that you could see some amount of quantitative easing also emerging from the US. Hence, global liquidity in my opinion will be strong in 2012.
Q: Does it raise the bar in terms of upside potential for the market?
A: Largely the market has already moved ahead of the expectations of these LTROs. What we now need to see are fundamentals catching up. There are set of events that the market would be waiting for to rerate the markets further from these levels. The events are contingent on the outcome of the UP elections. We have the central bank policy also coming up on March 15th and the union budget on March 16th. The direction of these policies will dictate the further rerating of the Indian markets.
Q: What do you sense when you talk to institutional clients now? Do you still get the sense that many people missed out and they would buy any dip in the market or are people getting apprehensive about the 20% rally and they want to take profits here?
A: Now clearly the rally has been sharper than what the market expected and there is clearly a review on valuations. I do not see fundamental investors or large institutional investors really rushing in and buying companies with broken balance sheets. They are willing to take a little liberal view on valuations given that there has been obviously some changes in policy both in terms of monetary policy, in terms of policy on currency and to that extent there would be some kind of rerating that we would naturally expect.
However, at these levels particularly for those stocks which have moved up very significantly, it is important to know whether the fundamentals are actually justifying these kind of valuations surge. Now we would be far more selective in investing in companies where we do not see potential for upside based on fundamentals.
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