Short term volatility in mkts to stay: Ajay Bagga

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Ajay Bagga, CEO, Lotus India AMC says that short-term volatility is here to stay. He believes that earnings will be the trigger for whichever way the market moves. Globally, the US economy seems to look like a slowdown. There are too many geopolitical risks running around in the markets, he opines.

According to Bagga, liquidity sems to be returning as far as the domestic markets are concerned.

Excerpts from CNBC-TV18's exclusive interview with Ajay Bagga:

Q: How do you sum up the local and global cues and influences right now, we are just under 13,000 for the Sensex?

A: Short-term volatility is here to stay. Earnings will really be the trigger now for whichever way the market moves. Quite clearly, April 13 will give an indication on the IT front. There are two camps clearly on the IT also.

You are seeing big order flows - is the rupee dollar rate going to impact it enough to really hamper the EPS growth below what was expected is a big question. Will the guidance be muted? Will it be conservative as has been the pattern? Those are the questions that led Wednesday's IT underperformance.

Going ahead, what are the key cues? Globally, I think, clearly US seems to be looking at a slowdown, but how strong would that be is a question mark. Oil has become a very big factor, we know about the eastern Afghanistan crisis looming with the amount of massing of troops on Pakistan border. Will Iran do anything irresponsible? Already we saw a day before a 10% hike in the price intraday, luckily it got cleared out in an hour. Those kind of volatility translates into all the other markets.

So I would say right now too many global cues, too much geopolitical risks are running around the markets. Liquidity seems to be returning as far as the domestic markets are concerned. We saw the call money rates coming down this morning. By next week, you should have some more liquidity around in the market as the government payment start getting cleared. Will that translate into more money coming into the equity markets? We will really have to see.

Last one month, definitely a lot of liquidity coming in domestically dried up and people were not willing to come in. So this has been a market, which has been moving more on global cues rather than any domestic participation. Will that change in April? It doesn't look very strongly in favour of that; we will have to wait and watch. So probably the market will move first and only then will you see domestic liquidity following the market; it won't happen in the other way around.

In terms of mutual funds, we have seen year to date about USD 650 million of net sales; so clearly there have been redemptions overall in the mutual fund industry. It is a derived demand; mutual fund selling. Not too many fund managers would really time the market and sell out their stocks and hold higher cash though cash is higher than the normal 7-8%; it is at 12% in the industry as a whole, but I don't think that has been caused more by selling but rather by redemptions coming through and fund managers holding cash balances in anticipation of any possible redemptions coming through.

Q: What is your take in the FMCG space and pharmaceuticals? The pharmas have bounced back on Wednesday - Lever is back up to Rs 200 plus. Do you like any of these two sectors?

A: Specially FMCG, it plays to the domestic consumption, to the demographic story and also very much in case there is global recession and the exporters get hit or there is a slowdown these are sectors which are good defensives. So, overall there has been interest in FMCG that is coming through.

Pharma is looking like a turnaround, it has been an underperformer for a long time, some good news flow is finally coming through, pharma is also looking good. We have seen the maximum volumes in pharma in recent days. A lot of players are revisiting the pharma valuations and their outlook for the pharma sector. These two sectors definitely are looking strong right now and given that there are good plays on the India theme, they are benefiting right now.

Q: With all these macro concerns swirling around, where do you expect the midcaps to go for the rest of this month?

A: Right now, my expectation would be if it is a market which sees a return of some domestic liquidity, that normally does chase after midcaps, so you could have a bounce in the midcaps to that extent. Very difficult to say,probably the market will give us signal only then domestic liquidity will come back unlike the foreign money which leads the market most of the time.

Right now what we have seen is people have actually lightened their positions especially in the IT space, in the banking, auto fears of slowdown. We have seen a lightening of positions rather than increasing positions. The actual events post - April 13 should not have that huge an impact, very difficult to say overall, but I would say this market will be a bottom up stock pickers market, probably few stocks will move the market rather than a broad based rally coming through. In the Midcap space, you will have to be very choosy about what you get into, but there could be some very good bargains going in that particular space.

Q: What do you think, April will be a better series or too difficult to call?

A: Very difficult, too many cues and I think the global cues will really dominate. Spring is coming and I am very afraid of the Middle East geopolitics and what will form out. I think it is better to remain cautious right now. Our markets will emerge, whatever happens globally; they will come out better but that will take time. So probably in the shorter term and as we are seeing with the fund flows also, more fixed income going through.

If you look at the Gulf fund flows, a lot of bond issues and issuance now coming through rather than equities. People are lightening up on equities across the GECC (Gulf Excellence Consultancy Company) countries and I think that is coming through in India as well in terms of the flows that we are seeing. Our fixed income products are doing roaring business while the equity funds are really lagging in terms of collections. So probably difficult to call and we will be much wiser in April end once some numbers and guidance have been received, I think it is worth waiting for that.

Q: Now, the point you were making about equity versus the fixed income plans - What is the trend that you have seen? Is it money from your equity plans that you are seeing re-routed into that space or are you getting a whole new investors that want to get into the fixed income side?

A: It is more the latter, it is more of the customers who are coming and trying to lock in these rates. The last fortnight, very strong rates have come in both on deposits as well as fixed income products, especially the fixed maturity plans have given pretty good potential of return.

So we are seeing more customers diverting their normal investments which could have gone into equities or other classes into these products. It was at about Rs 70,000 odd crore, the fixed maturity portfolio of the funds. By this month end, we will know how much growth has it seen, but I would hazard to say at least about Rs 10,000-12,000 crore should have come into mutual fund fixed return products in the last 15-20 days.

Q: Do you think that this trend will continue considering that there is still some uncertainty over the equity space and interest rates are likely to remain high at least for the moment? Do you think the fixed income space will continue to be favoured for the next couple of quarters?

A: Yes, I think so. Today, already with a little bit of liquidity coming back in the market and as we saw it in the overnight rates going down, we did see increased inflows into the fixed income. I think going into April that will continue. The rates are going to come down, that's the expectation quite clearly and if you really saw the yield curve, you were getting better rates up to three months and then it was flattening and going down on a one year basis and post one year there was just no rate worthwhile available. So clearly it was more a bunching up of lot of factors like advance tax going in MSS issuances and a lot of dividend declaration by companies, so which led to this liquidity.

Q: How would you treat the IT stocks as a class?

A: IT is clearly worthwhile waiting for the guidance in April. We were looking at more than 25% EPS guidance; it did get marked down over the last week as the rupee has strengthened so fast because there is a direct correlation, the hedging is not complete and many times, you cannot be that accurate and the billing is about 60-70% for the industry in dollars, so diversification is not that high.

Going ahead, it would be better to wait for the actual guidance than to plunge in right away. Some short covering could have happened rather than today being a genuine bounceback in the sector. But overall it is not interest rate sensitive, big order-flow is coming through. All those realities are very much there, the rupee-dollar is holding back the sector right now; we will have to see that.

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