No takers for midcaps; RBI, Re key triggers: Morgan Stanley

In the near term, the market is likely to trade in a broad range of 5,750-6,000, says Gaurav Doshi, VP - PMS, Morgan Stanley PWM. Over the longer term, rupee’s movement, inflation data and steps taken by RBI will be the three key triggers for the market.

"Till clarity emerges on all these three data fronts, the market will trade in a broader range. However, any sort of inclination towards deficit numbers moving lower, inflation declining and any reform push would make us believe that the markets would test the upper level of the channel and look to move higher," he explains in an interview to CNBC-TV18. Meanwhile, he cautions that the biggest concern for Indian markets going ahead would be reversal in foreign fund inflows. With US and European markets hitting all time highs there is limited scope for further upside there, so the flows with regards to India or emerging markets may not change in any hurry. On stock specific front, Doshi points out investors have turned averse to midcaps post the recent carnage. "We are now looking to deploy funds in large cap stocks that have corrected." Here is an edited transcript of the interview Q: We have seen a correction, we have seen a pullback last couple of days. What do you see now over the next few weeks? A: With the Budget behind us in the very immediate near term, the market looks very likely to trade in a range. The range right now seems a little wide, maybe 5750 to about 6000. However, the reason for this range is purely going to be one period of consolidation which is needed if the market has to move higher. However, more importantly, the market is looking to get cues from three factors over a period longer than the next few weeks. What we see emerge eventually with regard to the data on the deficit front in turn is going to have an impact on how the rupee behaves. The rupee is one thing the market is going to keep a keen eye on. Any move towards 52-52.50 will probably result in the market looking to test the upward channel of this range, and may be look to move higher. The second thing the market is looking at is inflation and interest rates. A Budget like this doesn’t say that the Reserve Bank of India (RBI) is going to start aggressively cutting rates. But we believe is that the inflation trajectory both for food and non-food inflation, if moving in the right direction and within RBI’s comfort zone, would make the market believe that over the course of the calendar year, the 50-75 bps cut that the RBI is expected to do should play itself out. Therefore, any sort of incremental news flow or trend emerging on inflation will also help the market decide which way of this channel to break with regard to the Nifty. The last and most important one is going to be the noise we continue to hear with regard to reforms. With the Budget behind us, we need to continue to see a move on the diesel price deregulation front all the way up to November. We are hoping may be another Rs 4-5 diesel price hike is something that needs to play itself out. Over and above that, the market is looking to hear from the government about coal price pooling, State Electricity Board (SEB) restructuring and any sort of incremental news flow. This is because that is finally going to be the driving force in terms of changing sentiment and improving reality on the ground level.  So, while clarity emerges on all these three data fronts, I think the market will trade in a broader range. However, any sort of inclination towards deficit numbers or inflation numbers moving lower, and any sort of noise on reform would make us believe that the markets would test the upper level of the channel and probably look to move higher. Q: What do you hear about money? Incrementally, is interest in terms of flows coming back, have all the tax issues or tax concerns been put behind institutional investors? A: From whatever little I gathered, at least the clarity that has emerged over the last few days seems to have satisfied a lot of investors and it is not raising any big concerns. In fact, to put it this way, I think the biggest risk India has over the next few weeks or next three to six months is going to be Foreign Institutional Investor (FII) flows turning around. Because as of today, FII inflows have almost hit 2 percent of the market cap of the entire stock market on a trailing 12-month basis, which is a significant number. So any sort of reversal in trend in flows would have serious implications.  I don’t think the flows scenario with regard to India or emerging markets per se looks like it is going to change in any sort of hurry, because I also believe that US and European markets are trading at all time highs. And the opportunity now over there seems limited in terms of the upside There is also a very unique trend emerging with regard to currencies because of what Bank of Japan is doing. We believe that investments in emerging markets for investors based in US and Europe would also be chasing growth as well as looking to play the trade that they can get in currency. Therefore, I think while flows to emerging markets continue to look like they will move in the trend they have been in, I would think that any sort of incremental noise on the three fronts I mentioned earlier would probably result in us getting a little better chunk of those flows. As of now, I don’t think the Budget has done any damage and India continues to receive its share of emerging market inflows. Q: The finance minister has indicated there are three issues coming to the market by way of an offer for sale (OFS) or otherwise. Two of them are Rashtriya Chemicals and Fertilisers (RCF) and Steel Authority of India (SAIL). How is interest on those kinds of issues? A: The interest right now from retail, high net worth individuals (HNI) or domestics isn’t that great, purely because sentiment is not very encouraging. We have to see the valuations, and if we do get good response from institutions in these offerings, the retail and HNI will probably then join the bandwagon.  They are looking for a leader, I don’t think they are looking to make any big aggressive bets. It will be interesting to see how this plays out because it will set the trend for the issues that have to follow. Maybe a good listing would probably help revive the retail sentiment, which as of now seems to be at an all-time low. Q: How are you approaching midcaps now after the carnage that we have seen over the last fortnight or so? A: Midcaps is a real tough one because it has really been a carnage. While it is very evident that there are some really good midcap companies, from an immediate point of view, the market has still got a clear bias towards large caps. And with the cash that we have raised, as of now our preference is to allocate to some large caps that have corrected. While we still think that there are some midcaps at mouth-watering valuations, we are not looking to increase the midcap exposure that we currently have purely because we just believe that in a choppy market you are probably better off buying midcaps at the lower end of the band or in case the band breaks down. Because with the values that they offer you don’t mind waiting a little longer and buying them a little later. But with regards to midcaps we definitely need to see domestic institutional activity pick up and local retail HNI activity to start picking up because there is no point in buying midcap stocks which then don’t participate with the Nifty on the  move purely because there is no interest on those counters or there is very low liquidity. Q. Do you think IT can continue its outperformance as it has over the last three-four weeks relative to the market? A: Relative to Nifty, given the year-to-date performance of stocks like Infosys, Tata Consultancy Services (TCS) warrants for some amount of consolidation. However, given the fact that in these companies the management is also starting to incrementally improve and that it is a great sector to hide in any event of uncertainty, I would think that the relative strength over longer period of three-six months will continue to stay in IT. May be the next two-three weeks would see some consolidation. Q: Have you guys changed exposure to banks at all, either in terms of the kind of financials you want to buy or in terms of net exposure? A: In January, we talked about the fact that the Bank Nifty had massively outperformed the Nifty by over 50-60 percent in the last two years and we had actually taken some money aggressively off the table on a banking exposure. That trade works well and we are simply revisiting, that is it a time to revisit banking and if yes, in which segments.  One question that definitely answers that, even if we were to revisit banking our priority will continue to be the private sector banks with a bias towards retail lenders. The second preference will be Non-Banking Financial Banking Companies (NBFCs) primarily targeting the retail customer, and the third and the last option is PSU banks for us because we still think incrementally slippages may continue over there.
Therefore while we continue to refer the private sector banks and they have also corrected. The question we are asking ourselves is that maybe there is another 5-7 percent downside before one should aggressively be chasing banks. We are not convinced that through the sheer outperformance of the Bank Nifty through this one correction has corrected itself. We think may be a little bit of consolidation or correction would provide a great entry opportunity into banking.  Lastly, with regard to the PSU banks there is just one thing that we are looking out over the next one-two months. We want to see how food inflation plays out. However any sort of trend emerging there which will make us believe that the RBI could probably turn more comfortable in terms of its rate-cutting strategy, then it would make sense to then look to add some risk in financials and move down the curve and look at the PSU space. Until that clarity doesn’t emerge for now we are happy to play the big large cap private sector banks. Q: How are you guys approaching real estate? Some of those companies are going to be hitting the market to raise some capital. Do you like realty as a story and a space now? A: Realty is a good story but there is a price at which it is good. A lot of these real estate stocks have had a massive run-up and therefore I don’t know whether at these current prices real estate is as attractive as it was two-three months ago. Having said that I still continue to think that there are pockets in the midcap space and real estate where selectively one-two companies on an isolated basis who have come out of this deathtrap or who are well insulated continue to look like good opportunities. Otherwise the broad real estate market has had a good run and while the noise is there with regards to offerings and all there will be a little bit of activity. However if I was to look at real estate I would wait for a better opportunity to enter.