Indian mkt looks constructive for next 3-5 years: Baer Cap

Despite weak fundamentals, Alok Sama, founder, Baer Capitals believes the Indian market is reasonably constructive from a three to five year view. Sama says the correction in the market is good enough for investors to look at from a long-term view. Uncertain political outlook has unnerved investors, but Sama believes the RBI's move to address monetary issues can give an impetus to the equity market.

"The monetary outlook in terms of the inflation picture becomes somewhat more relaxed as the RBI will have more flexibility to address the cost of capital issues," adds Sama in an interview to CNBC-TV18. Below is the edited transcript of Sama's interview to CNBC-TV18. Q: This has been a fairly turbulent phase for our market. Do you see the possibility of more downside just for the Indian market?
A: Yes, the Indian market is driven by liquidity. The risk on trade seems to be on and to that extent, the market is well supported. What one needs to be concerned about is, a slowdown. It is a cyclical slowdown in India. Look at barometers like auto sales. The auto sales in India did not fall for almost a 10-year period even through the crisis, the auto sales were fairly robust. But now, there have been four consecutive months of declining auto sales. The sales were down 26 percent in February and that is one indicator of a slowdown.
The level of confidence, the willingness to invest and the sentiment is as negative as I have seen in the last 10 years. So, the fundamentals in terms of the investment outlook, the demand outlook are not great. So, we are really reliant on the global liquidity, the risk on trade to sustain this market.
Meanwhile, you have issues along the way, like on the lines of the Dravida Munnetra Kazhagam (DMK) pulling out of the alliance and the concerns with respect to the government's commitment to a reform program. That’s a huge issue. India has a current account deficit (CAD) now at 5.5 percent to GDP which is a big number. It suggests that something needs to be done to the tune of 75 billion a year just to plug that gap that’s not going to come from FDIs. The country is reliant on Foreign Institutional Investor (FII) flows and that is a source of vulnerability. So, there is a lot to be concerned about. Valuations are reasonable, so yes, there is potential for downside but supported by liquidity is the bottom-line. So, we are in a range bound market within a fairly tight range. Q: The curve ball came for global markets from Cyprus and that saw a big eruption at least in terms of a risk aversion coming back. How are you mapping the global trends right now and are you concerned about how global markets may move?
A: Yes, the concerns with respect to Cyprus are probably overdone because it really is a fairly unique case in terms of the nature of the economy. The country has got a banking system with assets equal to seven times the GDP.
What is unique about Cyprus is also the fact that the depositors, which is what all the fuss is about, are primarily foreigners, mainly Russians. The official numbers are 35-40 percent but the real numbers may actually be higher. There is politics also involved in the issue. German tax payers are bailing out rich Russians and some of it may well be illegal money laundering. So, the politics of that are fairly ugly so what was asked for in the light of that situation is not unreasonable.
Of course, what concerns everyone greatly is that once again there is the element of arbitrariness. The bondholders were not required to take a haircut and retail depositors being asked to accept a haircut is also fairly unique.
However, I do think this is a unique situation and it will be contained. The collateral damage will be fairly limited and the markets seem to be fairly sanguine about that. What I am much more concerned with respect to Europe is the politics of Italy or the UK. The notion that the austerity programs are not working and these economies don’t have the same flexibility the US does is not a great scenario. Q: So, how are you approaching this market? Has it corrected enough for you to start nibbling at stocks?
A: Yes, with a sufficiently long-term horizon. The Sensex, Nifty is in the area of 14.5 times forward earnings relative to a five year average of 18-18.5. If one takes the view that this is a cyclical slowdown and the government, post election, will address some of the challenges like infrastructure bottlenecks, then that return potential is reasonable.
However, the politics in particular, in an era of unstable coalition governments in the foreseeable future, I don't see that changing next year post election. So, the political outlook will remain uncertain. The monetary outlook in terms of the inflation picture becomes somewhat more relaxed as the RBI will have more flexibility to address the cost of capital issues. That might provide an additional impetus to the market. So for a three-five years view, I would be reasonably constructive on the market.

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Q: The problem with political uncertainty is that it has raised concerns about whether or not the reform process is going to move ahead or that is going to begin to sputter?
A: I am not unduly concerned about that, because the reality is that people's expectations in terms of what would have happened pre-election were fairly limited in any case. The volatility in the political scenario in India is a given. That is just the fact of life in the foreseeable future and I don’t mean only the next few months, I mean the next few years. I do not see an alternative to yet another unstable coalition in the elections and it is a matter for concern. There are huge challenges that need to be addressed but one has pretty much factored that into one's analysis when thinking about India and the Indian market. Q: What is the way out of this mess? The fundamental data points as you have been suggesting have not been great? What could be a trigger that lifts the market out of this mess?
A: It is a great question. I hesitate to think of any one big trigger that could create a major upside in the market. I don’t know what could be a trigger, a potential trigger because there doesn't seem to be room for positive surprises on the political front in the next one year. If you have a stable government which a mandate for change, that could be an extraordinarily powerful trigger for rally in the market. That probably is the only one that I can think of because with respect to the global cues, I see more potential for downsides as opposed any major triggers that could suggest a substantial upside in this market. Q: So, how do you do this in terms of a sector or stock approach to the market because it started off as a great year for high beta? Do you go back to defensives now, how do you play it?
A: Yes, the defensives are probably a reasonable place to be in and that’s true, globally. Even in the US, the place to be in is large cap blue-chip stocks. So, large cap blue-chips dividend paying defensives are the right place to be in when you are in an environment which is driven by liquidity which is inherently risky. So, one wants to be defensive in terms of the individual stocks you own.