See rally in India, cautiously optimistic: Baer Cap

The Indian market has outperformed most of the global markets with about a 13% gain year-to-date (YTD). Alok Sama, Baer Capital Partners expects a fairly reasonable rally in India. He is cautiously optimistic on India.

According to him, the market is at an interesting stage where a confluence of local and global factors could provide it with some reasonable positive momentum. Also read: Nifty to break 5270-5320 range either way soon, says Sudarshan Sukhani Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos. Q: How are you calling the Indian market move now? A: The mood is fairly downbeat in India. But when you talk about recent pullback, India has done quite well. I think the market was up about 3% in the last week, close to 10% over the last month or so and 12-13% year-to-date (YTD). So, it’s been certainly the best performer amongst the BRICS and right up in terms of relative performance. So, I won’t describe performance in India as a pullback. I think performance actually has been reasonably solid, particularly in the light of all the negative news flows we have had with respect to India. I think the market, right now, is at an interesting stage where a confluence of local and global factors could provide it with some reasonable positive momentum. The global factors are a return to risk appetite. There is a sense that the Armageddon scenario in Europe has been avoided or atleast deferred. The central banks are about to embark on yet another loosening cycle. So, with the so called ‘helicopter effect’ and a sense of optimism in India, we are cautiously optimistic. Q: The eye has been quite firmly on global summits and global developments as well. In that context, what do you expect to hear from the ECB? What do you think a cut would amount to in terms of global sentiment or eking performance? A: By and large, I think people are taking for granted that there will be a minimum 25 bps rate cut. I think if that happens, that’s in line with expectations. I think if they cut rates by 50 bps, it would constitute a positive surprise and may cause a further rally in markets. I think the case for the ECB to cut rates is strong. The data coming out of Europe across the board has been weak in terms of all the barometers of economic activity. I think the politicians in the EU Summit last week have followed through and done some of the things that Mario Draghi would want them to do. That gives him leeway to follow-through from a monetary perspective as well. So, I think the chances are extremely high that the ECB follows through, but a 25 bps rate cut is pretty much factored in. That in itself is not going to be the cause for the markets to rally. They would have to do something more for markets to get excited. Q: What are you expecting from the Indian market? India has actually outperformed most of the global markets with about a 13% gain YTD. Would you increase your exposure to India? A: We would for a combination of reasons. One is liquidity. The expectation is that the ECB will ease. From Mario Draghi's perspective, I think the politicians have done their bit. That gives him some leeway to follow through from an easing perspective. The economic data clearly would suggest that there is a case to reduce rates in Europe by 25 or even 50 bps, that’s good news. You may see Bank of England follow-through and likewise easing in China. That augurs well for risk appetite. I think there are some India specific factors that people are quite focused on because the signals coming out of New Delhi have been confused. That’s been complementary to the degree that you have now had a fairly significant political change with the Prime Minister taking over the finance portfolio. That may well open the door for some much needed focus on reforms, modification, clarifications and things like GAAR. To the degree that there are positive signals sent out to international investors to FIIs, it would also be a positive. So, with combination of factors, risk appetite as well as India specific factors, I think you could have a fairly reasonable rally in India. _PAGEBREAK_ Q: Do you expect the risk-on rally in global markets to continue as well? A: I think it could have some legs to it. If you look at developments over the last 48 hours in the US, there is a clear sense that this is a market that wants to go up. The S&P 500 is sort of the ultimate barometer of risk appetite. Yesterday, you came out with some fairly lightweight data in terms of manufacturing in the US. The markets went up on the logic, we heard from a lot of market pundits and commentators that that elevates expectations of further Quantitative Easing, further loosening. But then again you look at what happened today with respect to factory orders coming our way ahead of expectations, which you would expect would discourage expectations or tamper expectations with respect to Quantitative Easing, the markets still went up. So, this is clearly a market that people were running scared. There is a lot of cash sitting on sidelines. People have been extremely bearish in terms of their allocation to equities. The key has been Europe and the fear of Armageddon. Last week, people were so incredibly bearish. They had zero expectations coming out of this EU Summit. There was a fairly significant positive surprise. I think that you could see a fairly reasonable rally carry forward into the next few weeks. Q: What about earnings season? How strong or paltry do you think the performance is going to be this time? A: We are fairly cautious on the earnings outlook. Things haven’t been great. If you talk to people in India across the board, I think expectation of earnings growth is probably in the region of 15% or so. So, it will be on the soft side, but we are cautiously optimistic. To me, fundamental or earnings surprise is not the reason to get excited about India. I think it is much more macro, much more global risk appetite and Indian politics that would lead us to be optimistic about India. Q: What have you made of the big pullback that we are seeing on the currency? A: Certainly, it had a pretty significant comeback over the last few days. In large measure, that’s a function of a return to risk appetite. The US dollar has receded against a lot of the emerging market currencies. So, a lot of it is simply risk appetite and people getting out of dollars and into currencies perceived as being somewhat riskier. So, there has been a bit of reset in that regard. There are India specific factors to the degree that the government is seen to follow-through, they have already loosened or relaxed the ability for foreign investors to invest in the bond markets. There is a little bit more confidence in terms of what’s happening from a macro perspective, from a political perspective. You could see some pretty significant inflows into India. That augurs well for the rupee. Q: Has the deficiency in the monsoons raised any alarm bells just yet? What kind of impact would that have on food inflation and in turn the inflation figure for the month? A: I think there certainly is a concern. It’s too early to hit the panic button. I think India in terms of its reserves of food stocks is in a much better position than it’s been historically, so not as vulnerable to the monsoon being somewhat below expectations. It’s too early to hit the panic button. You could see a catch up on rainfall. Food is a fairly significant component of the CPI basket in India, somewhere in the region of 13-15%, a significant component of inflationary pressures. So, it could have an impact. That in turn could have an impact in terms of the flexibility that the Reserve Bank of India has to follow-through on its easing cycle. So, it’s the transmission mechanism to markets is fairly complex. It’s a combination of factors. I think the most significant of which is how much flexibility the RBI has with respect to monetary policy. I think that the right signals coming out of Delhi on the fiscal side will be in some respects more significant in terms of giving the Reserve Bank of India leeway to follow-through from a monetary perspective.