See risk-on trade in India; gains to be capped: Finaport

The past few weeks has seen foreign inflows into the Indian equities pick up pace once again, indicating renewed interest by foreign institutional investors. According to Hans Goetti, chief investment officer of Finaport, the Indian market will experience a phase on risk-on trade for the short-term.

“The valuations look good, earnings estimates are somewhere around 10% and we think that the market has actually been very resilient over the past few weeks,” he said in an interview to CNBC-TV18. However, he says upside potential is going to be capped for the market, and therefore we can expect to see rangebound trading continue atleast for the next few months. From a global markets perspective, Goetti says that they are positioned for a risk-off trade, regardless of any short term bounces. Therefore, his advice to investors is to shift focus to the commodities space, where gold and silver are good buys at current levels. Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Q: What is your sense of how European equity markets are likely to move from hereon? A: We are in the camp expecting a risk-off trade, we are positioned that way. We are still long bonds mainly and equities are underweight. So regardless of some short-term bounces, we think equities will struggle over the next few weeks. That includes Europe of course, because after the euphoria of the EU Summit, a more realistic look at the outcome will reveal that the implementation risks are very high. Q: What about the possibility of something by way of quantitative easing coming from the US, especially if Chairman Bernanke were to hint at it even earlier? Could that change the course and make it risk-on at least for a bit? A: Absolutely. Equity markets these days are trading on hope of more QE, whether it's from the Fed or the ECB. The only thing is that there are diminishing returns on QE; these rallies that are based on that are getting shorter and shorter. We still think that the deleveraging cycle is very much intact. Under the circumstances, we have still faced deflationary pressures which are reflected in US treasury bonds and high grade corporate bonds, high yield bonds and so on. So we think that the risk-off trade is still very much the way to go over the next few weeks. Q: Have the investors you speak to indicated that they are putting more money in the Indian equity markets because of late we have seen FIIs slowly and steadily pumping money? A: That's right, but again India remains very much part of the risk-on trade. If you have these short-term rallies, Asia will go up and India will do quite well. The valuations look good, earnings estimates are somewhere around 10% and we think that the market has actually been very resilient over the past few weeks. We don't think it has much downside risk from here, although the upside seems to be relatively limited as well. So we think this is going to be a trading range for the next few weeks or even months. Q: We have seen crude run up the past few days, especially Brent which is now back above USD 102 per barrel. Are there more legs in that rally? If it is really a deflationary situation and if it is such a poor growth situation, where would you average crude as a commodity? A: Fundamentals would suggest that crude would actually have to come off, but as you rightly said, crude has become a risk asset. Whenever there is talk of quantitative easing or other liquidity programs, crude tends to go up along with equities and other risky assets. So at the end of the day, when you have more QE, and more QE will come from every central bank, there is still a flight into assets that represent value. Oil is one of them, and gold and silver too. Although those two assets classes have struggled also as of late, we think there is a great buying opportunity right at these levels for both because gold and silver would probably trade as a safe haven at some point. Q: Would you factor in a substantial easing from China hereon, especially after Wen Jiabao's statement today that they are looking for positive action? If that happens, how does that change the hierarchy of assets that money might chase? A: We think that at least another 100 basis point cut in the required reserve ratio in China, probably another interest rate cut, maybe two even. But we think that the trough in growth in India was probably in the second quarter and we are going to see a mild recovery in the third and the fourth quarter. The biggest problem will be 2013 and 2014, where we think China can actually hold everything together before the power transition. Social unrest being high on the agenda there, but we think that possibly we could see problems in 2013 or 2014 because we had this credit induced boom and at some point they are going to see a problem in the banking system.