India won't see strong inflows; IT best bet now: UR Bhat

Any rally in the market will now depend on today's Reserve Bank's policy meet, says UR Bhat of Dalton Capital. In an interview to CNBC-TV18, he says Indian equities will take cues from RBI's commentary and developments in global markets.

Also read: RBI likely to keep rates unchanged: CNBC-TV18 Poll The market is hovering near the 200-day-moving-average (DMA) and may fall quite significantly if there is a lack of positive newsflow, he cautions. He expects the market to be volatile in the 5600-6000 range.  Additionally, Bhat says the central bank may unleash more set of measures to help strengthen the rupee incase it continues to depreciate. Bhat's views come at a time when most experts are nervously awaiting any announcement on the RBI’s rollback on its rupee volatility curbing moves. Bhat adds that FII inflows into the market are not anywhere around the corner due to global slowdown. "All over the world we have huge problems with the economy. There is a risk-off trade that is likely to continue for some more time and we should be happy if there are no great outflows from India," he adds. Among the sector plays, Bhat advises investors to stay out of FMCG as it has gone past its valuation peak. He adds that IT, pharmaceuticals and private sector bank will continue to outperform.

Below is the edited transcript of Bhat's interview to CNBC-TV18. Q: It has been a weak four-five days for the Indian market, do you expect more downside over the next few weeks? A: It depends on what comes out of today’s credit policy statement plus also events internationally and whether any fillip is given by the government. However, at current valuations, there is not a great deal of comfort given the growth outlook. Ofcourse the issues is always about foreign institutional investors (FII) outflows, whether it is in the debt market or on the equity market. We should watch this space closely. We are interestingly poised at very nearly the 200-day-moving-average (DMA) and therefore, a fall could be quite stiff from here if things do not turnout the way all of us want it to be.

Q: How bad do you think the fall could be for the market because in the past we have managed to retain our trading range at any rate? A: The trading range would still be there because February-March lows of about 5,600 is very difficult to breach. Given the fact that we have had a fall for the last almost one week now and with the big event of the credit policy today, there could be a bounce from here. It is not as if the market has to go only one way but I think the trading range has sort of expanded from 5,600 to 6,000. So, that is a very wide range but it will be very volatile within this range given the newsflow of the day. Q: Even if there is no rate action but the commentary is hawkish in the sense that it suggests this kind of tight environment needing to continue for a longer, do you think it would be reason to sell down the banks further? A: The reason to sell down the banks further would be on their fast accretion of non-performing assets (NPAs), if not anything else. This could be an added stone but the point is, there is a lot o steep tightening that we saw over the last few weeks, and it is probably going to stay for some time, atleast for a few months. We should not be any further hawkish. With this sort of relative stability that we have seen in the forex market, if it continues for a few more weeks, if the RBI says it may consider withdrawing that harsh measures that were implemented. This could give a huge fillip to the market.

However, it is not going to be less hawkish than this. The point is that the commentary is extremely important and if this is not expected to continue for a longer time and the real indication is that it will continue only a few weeks and thereafter things will be fine, that would be a big fillip to the market.

Q: How durable a fillip because with that assurance might come the gates opening up for the rupee to depreciate again and the rupee back at 61/USD if that happens, do you think the market's cheer would be short-lived? A: That is of course possible. That is dependent on the assessment of the Reserve Bank of India (RBI) on how stable the rupee could be around 60/USD levels. There is always an element of surprise that the RBI can come up with even if they say so and if rupee starts depreciating, they can come back quite hard on this. _PAGEBREAK_ Therefore, given that they have taken the measures over the last few weeks, the forex market atleast is not going to be in a great hurry to take bullish position on the dollar in a great hurry. Therefore, I think there would be some semblance of stability at this level. They might indicate a timeline but the commentary would suggest that we can probably take a call on how long this could last. Q: What is going on with FII interest because equity markets are seeing no inflows, even debt markets have not seen much over the last ten days and that remains a problem in the absence of pretty much any other buying in any of our markets? A: That is the way it is likely to be given the state of the global economy with the US Fed tapering its quantitative easing probably sometime in the next couple of months. Plus there is a situation with Europe continuing to be quite bad; China having a slowdown; and Japan is not offering a great hope. So, all over the world, we have huge problems with the economy. There is a risk-off trade that is likely to continue for some more time and we should be happy if there are no great outflows from India. I think the outlook for great inflows is simply non-existent. The only thing that could be on the margin that could help the market is some decisive action by the government in terms of reforms, in terms of doing something about a slowdown in new projects. If these things come about, there could be some sort of semblance of stability around these levels.

Q: Would you expect the money to come in and support this fall we have seen in the fast moving consumer goods (FMCG) space or is it different this time around, are people getting cautious on where these stocks are trading at and whether they should be bought anymore? A: I think there certainly is going to be some sector rotation out of FMCG. Even the levels that they have reached in terms of valuation, there would be a sector rotation. For example, IT is something that is the latest favourite. IT, pharmaceutical, private sector banks will continue to hold the roost for some more time but FMCG has clearly gone past its valuation peak. Therefore, FMCG is not something that one should be very bullish on at these levels. Q: What kind of second half are we set up for the markets in that case, we remain resigned to this range or do you think the second half could show up sharper cuts for the market? A: Two good things that could come about in the second half. One is, the after effects of a good monsoon. That could show in terms of better rural spending. Second is in addition to the run up to the election, I think government generally spend a lot more. These are two things that can probably revive consumer sentiment atleast in the rural sector in the second half. So, these are the two positives. The negatives are always going to be the global economy and the potential for FII outflows and the consequent instability in the market. It is the balance between these two sort of aspects and we need to watch that space very closely. Q: Are you buying any banks now, public or private? A: Private sector banks have given a good account of themselves in managing the slowdown in the economy over the last several months. Public sector banks have had problems on NPA accretion and the ability to manage NPAs. But probably we are not very far away from the absolute bottom as far as public sector banks are concerned. I think RBI would probably tweak the rules a bit to ensure that no further great addition would happen to the NPA, they are stable as far as public sector banks are concerned. Therefore, I think we are probably a couple of quarters away at best as far as the bottom or the public sector banking space is concerned. Since we cannot call the market bottom very well, it is time to nibble because these June quarter results have been terrible as far as the public sector banks are concerned. So, they are available at distressed valuations virtually so I think one should start nibbling away in these stocks and hope that a turnaround is not more than a couple of quarters away. Q: What do you do with a space like technology now? Yesterday Wipro got 7 percent reaction for itself, is IT still a good place to hide? A: On balance, this is probably one of the places where one could hide because the top rated IT companies have done probably substantially better than initial expectations. So, given that there is some sort of revival in the economy in the US, these are the sort of companies, which can probably help us protect values in India. I think IT is a space one should be at least marginally overweight.