Dalton sees little upside above 6K; max 15% returns this yr

UR Bhat, managing director of Dalton Capital Advisors believes the Nifty will have limited upside above the 6000 levels, as there is no decisive trend visible in the market at the moment.

According to Bhat of Dalton Capital, foreign fund flows could moderate further as most global money managers were no longer underweight on India. Bhat says the kind of fund flows witnessed last year was unlikely. Also, central banks across the globe were likely to start tightening again, and this could have implications for worldwide liquidity. 
For India, Bhat says, the current account deficit (CAD) remains a key cause of concern as gold imports will continue to stay high despite government measures.
In this backdrop, he does not expect the market to deliver more than 15 percent returns this year. He advises investors to remain cautious at current levels, maintaining a defensive stance given recent the market rally.

Below is the edtited transcript of Bhat's interview to CNBC-TV18. Q: It was a terrific pullback last week. How is the market positioned right now ?

A: The market is sort of giving confusing signals. For example, in February we had about USD 4.5 billion of FII flows into India and the market underperformed. The market came down by about 6.5 percent in dollar terms. Month-to-date in March, considering almost half the month is over, we have had a very small inflow of something like USD 0.5 billion or less and the market has bounced back by about 5 percent. So, that is somewhat confusing.
Even on the macro side, the stock market seems to be entirely disconnected for more than a year now. Therefore, liquidity is the key for us to be looking for direction as far as the market is concerned. But even that connection has broken down in February and month-to-date in March. Therefore, I think the whole market scenario is somewhat confusing. However, given the fact that it is just liquidity in the medium term that has been guiding the market, I think it is worthwhile to watch what is happening internationally. The potential inflows can continue to come to India. The fact again is that India is not as underweight as it was in the beginning of 2012 for more allocations. India is reasonably well balanced today, in most international portfolios. Therefore, the incremental money cannot probably be as much as on a relative basis as it was in 2012. So, I think on the whole, monetary easing has to continue in a pronounced manner for the market to really start continuing to look up. That’s a bit of a problem because now in Europe we have new confusions coming in once again. Q: How do you see the macro shaping up now in specific reference to the current account deficit (CAD) and the rupee? What role that will play in determining whether flows continue?
A: At some stage, FIIs would be concerned about the CAD and also the fiscal deficit. Yesterday's figures gave some solace in the very short-term. But the fact is that gold imports have not really a come down dramatically, neither have oil imports come down. These are two important factors that determine the CAD.
Exports have sort of changed direction for the last two months very marginally but I think something much more is required in terms of momentum toward exports for the CAD to be strongly addressed. It will probably take some time. This year is likely to be in the four percent range CAD. However, the international situation needs to improve and the outlook for exports too needs to improve dramatically, alongwith some sort of impact of diesel price hike on usage of crude oil imports. These are the things that can really have a medium-term impact on CAD.
However, there is nothing much really to write home about on CAD. Therefore, the outlook as far as foreign investors are concerned continues not very bright as far as India is concerned. It is just that there is so much of inflow on account of continued monetary easing that money keeps coming in. As I said, there is a word of caution that we need to exercise here because India is not as underweight as it was in 2012. Therefore, India is probably near neutral as far as most FII portfolios are concerned. Therefore, the relative allocation that was there in India, somewhat higher compared to other emerging markets in 2012 - that might now continue this year. If you really see the first half of March also, there seems to be lack of momentum as far as FII inflows are concerned. Almost the first half of March is over and we are still not even got about USD 0.5 billion dollars. Therefore, there might be some lull on FII in flows. If that continues, markets might really come down. So therefore a word of caution is certainly in order.

Q: We got away from that 5500 scare. Now, we are sort of flattening out again in the 5900 zone. In the near term, what kind of range do you see this market moving in?
A: The range of 5600 seems to be a good support. The 200-day moving average is not much different from that. So, 5600 is a very good support. On the upside, I think it could probably just go past 6000 and not much more than that because there is nothing to suggest that there would be a sudden change in the attitude of FIIs and they will bring huge amount of money in the second half of this month. Therefore, I think March would probably be in the range of about 5700-6000. I don’t think that range will be broken atleast in March. Q: Would you go so far as to say that that’s what the year could be shaping up like just a trading range and not the kind of returns we saw last year?
A: I think this year, at some stage, there would be some halt to monetary easing because this cannot continue forever. It can’t continue, atleast not without huge costs in terms of inflation being paid for in the international markets. Therefore, we go along this year, there will certainly be some talk of monetary easing being curbed, whether the US or Europe. That could pave the way for some correction. Therefore, I don’t see the market giving 25 percent sort of returns that it gave last year unless things dramatically improve in US and in Europe which doesn’t look likely based on the information that is available now. So I think it would be an average year with probably 10-15 percent sort of returns, but not much more than that this year.
_PAGEBREAK_ Q: How are you positioning yourself tactically for the rest of the year given what you described as your outlook? Is your portfolio still very blue chip, very quality focused even a tad defensive?
A: I think it is all of that. One needs to be invested in blue chips at this state of the market with market being around 5950. Also, one needs to be somewhat defensive. This is not the time for being aggressive as far as the investment stance is concerned. One needs to just sort of wait it out because the market is probably going to trundle along in a tight range.
Therefore, you just have to wait it out and hope that corporate performance might improve over the next couple of quarters because as all of us know that last almost 12 months it has been only market relating that has given the returns. It is not really a corporate earnings growth. Therefore, I think the turnaround for corporate earnings growth with earnings growth sort of showing some significant growth should probably happen over the next couple of quarters. That is if all the decisions that the government has taken during the Budget and just before the Budget is going to bear some fruit. Therefore, based on that, one needs to be defensively oriented with a couple of stocks where there is some movement on infrastructure, on stalled projects. Therefore, I think it’s a mixture of both but quite largely it needs to be blue chip oriented and defensive. Q: Everybody is talking about some possible improvement in growth both earnings and macro over the next few quarters. In the re-rating of the last one year do you think the market is pre-empted or largely priced this improvement in already?
A: The market has really priced quite a lot of this improvement. Infact, most analysts have been saying that they have reached the trough as far as corporate earnings and the economy is concerned for the last two quarters now. However, the trough seems to be more of a U-shaped sort of a trough. It is taking some more time for the actual revival to happen. We have really not seen a momentum in terms of earnings upgrades. Therefore,  barring that, it is just hope. In the run up to the elections in the next 12 months, we probably will not see too much of public policy momentum because if anything, the government would need to be somewhat more populist oriented than reform oriented. Therefore, I think there is a lot of hope built in. But, one of the strands of hope is that as far as the stalled projects are concerned, the government will go the whole hog and see that stalled projects are revived. That could actually give some momentum to the industrials and the infrastructure sector. That is probably a theme worth playing. Q: Has the market also priced in any potential action that may come in from the Reserve Bank policy next week?
A: I think 25 basis point sort of cut in repo rate is sort of priced in. It is sort of widely accepted that something like that could happen. However, I don’t know whether there is really a case for any further cut from more than 25 basis points this month given that a lot of large banks are increasing deposit rates. Therefore, with the deposit rates being increased to garner some year-ending deposits, it is very unlikely that even the repo rate could get translated into reduction in base rates across banks. Therefore, as long as the transmission mechanism is not sure that it will work, even RBI will go the whole hog and keep cutting interest rates when deposit interest rates are going up in the market. Q: Does it still have a meaningful relationship though? What happens with these rate cut decisions versus what the market does because the previous experience is that the market actually begun its downtrend after that surprised rate cut came through. Does the market care that much for 25 bps any more?
A: Not really, because if you see the lull in the industrial activity, it is not really because of interest rates being high or even a 25 basis point cut in interest rates changing the outlook dramatically. It is really largely because of stalled projects and the sentiment that has been affected for new investments as a result. So, unless that is addressed, tweaking interest rates by 25 basis points or so is really not going to change the outlook as far as entrepreneur’s interest in putting up new projects is concerned. The pipeline of new projects is pretty thin as of now. Therefore, we will probably have an extended period of slowdown over the next 12 months if the pipeline is so weak. So, we need to really address that issue of stalled projects which have got caught up in rigmarole of various approvals in the government for the revival in investment momentum to take place. That is what is pivotal for the growth ahead rather than a 25 basis point cut in interest rates. Q: We are seeing our growth at the lowest level - 4.5 percent over the last couple of quarters. At a time when global markets and economies have been quite benign, since August-September last year, there has been no turbulence in global markets at all, none worth speaking about. Do you fear that as we go deeper into 2013, this basic framework may not be as benign and supportive as it has been while we are going through this troughing U-phase?
A: We have two important factors in international markets. One is the debt ceiling negotiation in the US. That is at a very critical stage now. Hopefully, over the next few weeks there will be some solution found to that. There is also a new sort of instability in Europe with rate cuts and with political instability in Italy apart from the increasing unwillingness of Germany to support the peripheral European countries because of elections over the next couple of quarters. So, I think the instability in Europe might actually be a precursor for a risk-off trade sometime, but assuming that these things get sorted out over the next couple of quarters, things might look benign. It is not as if any developed country is in a position to withdraw the monetary stimulus that has been there for the best part of more than couple of years now.
As long as that continues, the momentum in terms of flows might continue but it will not be probably as strong as in 2012. India was quite underweight in most global portfolios. Today it is not so. Therefore, the relative allocation towards India would not be as large as it was in 2012. However, I think some amount of inflows would continue, but it has got to be backed by public policy momentum in India and addressing the various structural issues that we have in generating investment revival. So, unless that happens, I think the outlook does not seem to be very bright. Q: Has the panic choke up situation in the midcap space alleviated? Or do you think there is still danger from that space?
A: I think there would be continuous danger because every now and then, we find a new scrip being targeted largely because one anchor investor has just withdrawn from that particular counter. I think this would continue and the news flow too. If you see the number of midcap stocks where promoters have pledged the shares to about 80-90 percent of their holding, the list is so long, that one sort of deep correction in the stock price would sort of ensure that all financials would come to the market. Therefore, there can be a huge correction in midcaps. So, this is one risk that most investors need to factor in, especially investment to those stocks where the promoter pledging is very high, one needs to factor in this. I think the carnage as far as midcaps and smallcaps is concerned, is not really over because quite a lot of holding in these companies are still from institutional investors who might actually exit from this given the experience of the last few months.