Nifty may drift to 5400-5250; stick to defensives: IIFL

Nirmal Jain, Chairman, IIFL feels political uncertainty will continue to keep the market on the edge. "There is a probability that there can be early elections and that would mean all the reform processes even if our Finance Minister is very keen to push them through, will have to be put on hold,” he says in an interview to CNBC-TV18.

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Jain expects the market to correct in the near-term and the Nifty to drift 5400 or 5250. He advises to stay invested in equities and buy stocks like IT, pharma and a selective oil stocks, due to the fall in oil prices.
"I would reduce exposure to gold and put more money in bonds and debt securities because interest rates will fall. Going forward through the rest of the year, I would see that interest rates are falling and therefore, debt investment will give you very good returns," he adds. Below is the verbatim transcript of Nirmal Jain’s interview on CNBC-TV18 Q: It has not been a good couple of days. What are the chances that we are entering a bearish phase in the market, not just a routine correction?
A: There are fairly good chances, quite a few things have changed. This year, we got USD 10 billion of foreign institutional investor (FII) money but still market hasn’t moved. Infact, USD 10 billion of FII money has absorbed USD 5-6 billon due to selling by domestic institutional investors (DIIs) and other USD 5 billion by way of offer-for-sale (OFS) or government divestment.
Now, situation has deteriorated globally as well as back home. Locally, the political worries now have become far more intense. There is a probability that there can be early elections and that would mean all the reform processes even if our Finance Minister is very keen to push them through, will have to be put on hold. This is because once elections are announced, government will not take any major political or economic decision. From a foreign investor’s point of view, things will get into limbo at best and worse situation can be more uncertainty continuing through elections.
Globally, the China slowdown worries have become serious; commodity prices have collapsed, so the risk off sentiment is back. Not only that, ASEAN countries like Indonesia, Malaysia, Philippines are doing far better, they have a more stable political regime. Whatever money is coming into these emerging markets (EMs), is now getting diverted towards these countries.
Now, we have a situation where locally there is hardly any money coming into mutual funds and insurance companies and FII money of USD 10 billion has also not moved the market. Going forward, the FII flow will slow down for sure even if it doesn’t become negative. Therefore, market may be in a corrective phase for sometime now.
_PAGEBREAK_ Q: What are you hearing from your institutional desk in terms of the slow inflows and outflows that we have seen from global investors over the last two-three sessions?
A: Last year after the new Finance Minister took charge, he did road shows and gave lot of confidence and a lot of optimistic assessment of how things will move forward. However, now, investors are getting worried because whatever they are reading politically, they are again concerned whether the reform process will move or not. Whether this government will last its entire term or not, so that is one worry.
Secondly, some of the key sectors like power, haven’t moved. Coupled with that, there is one pool of money that they invest in India as well as other countries and more importantly ASEAN countries where things are looking more optimistic. The flow of FII money should slow down. I don't think that is very bearish or a completely negative scenario, because liquidity in the US, as well as Japan is very benign and flow will not become negative but will slow down. Q: What did this market do when it got full throttle flows? We were down for the first four months of this year, if flows slow down, what could be the potential impact on this market?
A: Market can correct, it can drift lower. This is because most of the stocks that FIIs own, their valuations are not very cheap, they are attractive. More money will flow to IT and pharma sector again because they are defensives. The metal stocks have collapsed because metal prices have come down, globally. China slowdown worries are getting more serious now. It was expected, but since it is happening now, the market can drift lower, the broader market, more driven by metals and all other stocks.
When people look for defensives or safe havens then again more money will gravitate towards IT, pharma and very select FMCG stocks because even consumption is slowing down which is another worry. Looking at a 6-12 months scenario, then the commodity prices falling, the crude oil prices falling, gold prices falling - they all auger well for our current account deficit (CAD). So, these would be in a corrective phase for next couple of months, next two-three months and then one will have to look at developments after that. Q: A lot of midcaps have already suffered, would you say it is looking like a bear market?
A: I don’t know how to define a bear market, but Nifty can drift to 5400 or 5250 also going forward in next few months. But, if you say that will the market collapse in a bear market by 30-40 percent, I would say no, that is not the scenario. I would rather use the term as a corrective phase rather than a bear market. But yes, the odds are now more towards markets drifting lower rather than moving up from here unless something unforeseen or unexpected happens. Q: What do you do with your money this year then? Gold has corrected, stock markets have come off and even bond yields have started going higher. What is the best place to put your money for the next few months?
A: One should not be out of equity. Within equity, you can shuffle your portfolio and put your money into IT stocks, pharma stocks and also a selected number of oil stocks. This is because the oil prices fall, subsidy burden eases and the upstream oil companies as well as oil marketing companies (OMCs), also subsidy burden is reducing with diesel prices being increased every month.
You keep your money in equity, but reshuffle your portfolio and be overweight in these three sectors. You can take a select bottom up exposure in some other sectors. Other than that, I would reduce exposure to gold and put more money in bonds and debt securities because interest rates will fall. Given that, even though the G-Sec yield after the Budget has moved up, going forward through the rest of the year, I would see that interest rates are falling and therefore, debt investment will give you very good returns.