Mkt upside limited; funds moving to FMCG, IT, pharma: IDFC

Kenneth Andrade of IDFC finds valuations fair and those looking to play the market now should buy on dips and sell on rally. He does not see much room on the upside for the market from current level.

Also Read: Funding environment challenging; NPAs to rise to 1.5%: IDFC

"This market seems to be very tactical. It is a very difficult time to make money in an environment like this unless you are pretty fast off your feet and that is not something that you can do with fair amount of regularity," he told CNBC-TV18 in an interview. The market will be closely watching how elections pan out, he added.

He feels investors now prefer taking valuation risk than taking business risk. So, funds are getting polarised into high quality businesses such as FMCG, IT and pharma, he elaborated.

Below is the verbatim transcript of Kenneth Andrade's interview on CNBC-TV18

Q: What is your call on the market now? It has almost become a binary event that if there are some reforms then maybe we go up otherwise it looks like the market is doomed. What is your more fundamental call right now? Do you think we have factored in most of the bad news for the market or do you think there could be some more downside as we head into the next month?

A: I really do not want to comment on what is going to happen next month, but the way we have effectively positioned ourselves through the current financial year we are heading into elections and that is very clear from all the policy action that has not been taken so far. It has been a year where you had significant amount of social measures. Things that have plagued the markets are two deficits, that is not going to go away in a hurry. All said and done, this market seems to be very tactical. You have to buy on lows and every time you get a bounce you sell it, but there is nothing structural about it. So it is a very difficult time to make money in an environment like this unless you are pretty fast off your feet and that is not something that you can do with fair amount of regularity.

So the way the market is we are just looking for things which are structural in nature. Nothing is coming by so far. Valuations by far are fair. They probably are not cheap given where your interest rates are, but valuations by themselves will not create enough of room on the upside. So we are in a zone where we will have to take some time out. We will have to wait and see how the political events pan out, wait for the elections and see how events pan out over the next couple of quarters.

Some of the events that will pan out over the next couple of quarters, some of the most significant ones are the results and going into the next quarter which is the December ended quarter it is not going to be a very pretty site.

Q: How are you positioned on IT? Would you still accumulate despite expensive valuations?

A: That has been the norm with the market for a pretty long period of time now and that is not in isolation with India, but it is across the region in some part of the globe itself. The money is effectively getting polarised into high quality businesses and as long as those high quality businesses show some events of growth valuations actually balloon out there. So right from 2011 onwards you have seen high valuations in the Fast Moving Consumer Goods (FMCG) space, you have seen high valuations in the pharmaceutical space and now you are seeing reasonably high valuations when it comes to IT.

So the flight of money to quality assets is in continuation. So that is how we will have to live with it and that is not going to stop now, because the opportunities are getting far more limited to buy into other spaces. A very large part of the cyclical market is actually losing money and going down further despite valuations being chased. So I think we will be in continuation. Money will seek safety. So a lot of investors prefer the valuation risk rather than taking on the business risk or the solvency risk and that is what we all see as far as capital markets are going.

Q: In terms of positive triggers there is so much hope now on the diesel price hike that it seems that the market may not even react if it comes true. If there is a Rs 3-5 diesel price hike that comes in in the next week or in the next fortnight what do you think the market reaction could be and how much of a positive trigger could that be for equities?

A: Rather than a one-time price hike of Rs 3 or Rs 5 or whatever that number can be we need a more structural approach to this entire problem. Remember, the last year and going into this year subsidies as a percentage to total GDP are hitting all-time highs and these are very unsustainable numbers.

Finally, we have to move into a market environment and till we do not move into the market environment whatever the government might want to do as far as price hikes are concerned it will just be a drop in the ocean. Market might react for two hours and then it will just give away. So I am not too sure if you can fix the broader problem with bits and pieces. It has to be more structural in nature. You have to have a defined timeline around which you can move the entire environment to a market economy. That is what all the external capital outside is waiting to see whether it will happen or not.