Pharma sector to outperform in 2010: Principal MF

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

In an interview with CNBC-TV18, Shyam Bhatt, Senior Fund Managers, Principal Mutual Fund, speaks about the markets and his outlook for 2010.

Here is a verbatim transcript of the exclusive interview with Shyam Bhatt on CNBC-TV18. Also watch the accompanying video.

Q: Where do you see the maximum uptick coming from- the smaller cap stocks, the smaller priced stocks, the midcap or the largecaps?

A: In the current year, we have seen more than 100% moves in the smallcap indices and almost 100% in the midcap index compared to something like 70% in the largecap indices. Individually, we have seen small and midcaps grow much more in terms of price appreciation this year.

As we go into next year, this is likely more to be a stock pickers paradise. It is going to be a test of stock picking in 2010 primarily because the bulk of the re-rating in the market has already happened this year. So there is not much scope for a re-rating of the broad market or the largecap index per say. So  individually we are likely to see good quality midcaps continue to do well in 2010, provided they keep delivering on the earnings growth, which is now expected from them now that our economy is picking up.

Q: Given the fact that there is certain expectation that interest rates may perhaps head higher, would you play cyclical at the moment or you would go with defensives like pharmaceuticals or you take a contrarian call and say we basically need to go with interest rates so? How do we play given the interest rate scenario that maybe building up as we speak?

A: I think a balanced portfolio comprising of a mix of interest rate sensitives and defensive stocks is what we have been playing for some time and we are likely to play that going forward. Pharma is one of the significant overweights for us as a fund house. Pharma sector will do extremely well next year. It has done well in the past few months as well, but we think the outperformance will continue. As far as other interest rate sensitives are concerned, I think it would be more sock specific rather than sector specific as we go forward.

Q: One of the most obvious question in the market now is how does this market break out of the trend that it has got into in the past say 12 weeks- this 4,800 5,200 range. What would you watch out for? Do you in principal watch out for any levels, which it should technically break or would you watch out for any other coordinate indices that like the dollar index? How do you play this possible bet out of the range?

A: At Principal, we don't really go by technical levels of the indices. Though, we do consider macro factors- the dollar index. So we consider the macro factor of whether or not the dollar is going to continue its weakness or whether its going to continue strengthening like what you have seen in the past few days. That is an important factor given the fact that the dollar carry trade has been one of the biggest factors for the liquidity surge in the emerging markets. So that is something to watch out for as to whether the dollar strengthening is a very temporary phase, which is what we believe or whether it is for a longer phase in which case emerging markets could get impacted.