Don't get tempted by mkt rally; macros still weak: Advent

Long-term investors should try and not get tempted by this liquidity-driven market rally because fundamentally things still remain the same, suggests KR Bharat, Advent Advisors. "The market will offer a lot of temptation, but I completely conquer with the view that markets are going to be very difficult and challenging for the next three-six months at least assuming that we get our policy act together,” he told CNBC-TV18 in an interview.

Also Read: India rallies 20% in 20 days: Are EMs back in favour?

The postponement of stimulus withdrawal has given India a larger window to fix its macro woes but from a market perspective it indicates that if one is depending on foreign funds for its market to rise then the party is going to last a month or two more and no longer, he explains. So, investors should now take bets based on macro economic fundamentals and the long-term prospects of the company. "The macro economic fundamentals of the country are now damaged and need to be repaired. If I were an investor I would wait because I do not have evidence, anecdotal or otherwise to believe that the repair activity will start tomorrow. Once I get the confidence that the repair activity has started, then I will start taking small bets and will slowly increase the size of my bets going forward," he adds. Bharat remains bullish on IT sector as he does not see the rupee appreciating remarkably from its current levels. Therefore, believes it will be a reasonably good period for the IT sector, given the fact that there is recovery in the US and in parts of Europe as well. Also Read: India rallies 20% in 20 days: Are EMs back in favour? Below is the verbatim transcript of KR Bharat’s interview on CNBC-TV18 Q: The next trigger for the market will be the earning season, how would you approach the market now? A: Not very differently from the way I would have approached it 3-9 months ago. From a technical prospective what we saw overnight from the Fed will ensure that liquidity does not continue to be a problem as far as money is coming into emerging markets. The fear that rupee could depreciate and therefore, our hands will be tied is behind us for at least three months. But even as the governor recognises and mentions that at some stage tapering will happen so at some point in time one will have to jump off the skyscraper. The only question is whether you jump from the 20th floor or the 30th floor, but at least for the time being liquidity does not seem to be an issue. From fundamental perspective, to a large extent most of the problems that we have been demurring for the last year, year and a half in India continue to remain whether you speak about inflation, current account deficit, fiscal deficit or the investment climate. After a couple of years, I am now beginning to see some silver linings in the form of some action emanating from New Delhi, the infrastructure projects that have been fast cleared. The emphasis on austerity over the last few days are all pointers to the fact that government is now aware that they need to do something drastic on the fiscal front. I am a little disappointed that we haven’t seen any action on the diesel price front yet but hopefully that is round the corner. I am not as worried today as I was a couple of months ago but the current account deficit, the RBI in conjunction with the finance ministry have taken measures to ensure that there is no bigger concern as it was but both fiscal deficit and inflation continue to be areas of concern. Unless we can demonstrate that inflation has actually come under control not for a month or maybe two but for a consistent period of a quarter, it will be very difficult for the regulators to put in place the kind of growth oriented measures that the market is desperate to see. We have to wait for that but no one has a magic wand and the problem that has taken two and half to three years in the making is not going to get solved overnight even in three or six months, it will atleast take 6-9 months if not more to get sorted. There are signs that some action is being taken. We need to see whether these set of actions will continue on a regular basis or will they be one off. At this point in time I am more optimistic than I have been in a long-long time.

_PAGEBREAK_ Q: How does an investor approach this market now because it has been a stealth rally, not too much participation from 5100 to 5900 levels? Do you get in now or do you fear that we have reached the top at 6100 zone? A: If you are speaking about people who are medium to long term investors in the market and not traders then I would advise them to trade very warily. This is because markets will continue to be very volatile and the danger of remaining out of the market is that every second day one is going to regret having stayed out. One day the market will fall, the other day the market will rise and every day the market rises one will wish that one hadn’t stayed out. So, in these volatile times it is going to require a lot of effort to stay away from temptation but I strongly advice long term investors not to get tempted. The markets will be volatile. They will offer a lot of temptation but I completely conquer with the view that markets are going to be very difficult and challenging for the next 3-6 months at least assuming that we get our policy act together. The reason I say that is, fundamentally things have not changed. From liquidity perspective the story is pretty much over, we now know exactly what will happen, what to expect. Tapering has been postponed but at best it gets postponed until after Christmas so after that one will have tapering. It gives the regulators in India a larger window to get their act together but equally from a market perspective it is telling you that if one is depending on international fund flows to take your markets up then the party is going to last a month or two more and no longer. Now, whatever bets an investor has to take will have to be based on macro economic fundamentals and the long-term prospects of the company. The macro economic fundamentals of the country are now damaged and need to be repaired. Assuming that one starts a repair process as soon as possible the impact of that will take 6-9 months to take effect and therefore, if I were an investor I would wait because I do not have evidence, anecdotal or otherwise to believe that the repair activity will start tomorrow. Once I get the confidence that the repair activity has started, then I will start taking small bets and will slowly increase the size of my bets going forward. It will be difficult to stay away from temptation that is what is my advice to investors would be. Q: What about IT names now? There was a bit of profit moving once the currency appreciated. But on Friday, some sense of buying came back. How are you positioned over there? A: I am still bullish on that sector, because regardless of which way you look at the rupee now it is reasonably close to its fair level. At Rs 68 it was clearly undervalued and the fifties were doing the rupee a favour. In their own hearts the regulators will not be too unhappy with where we are today, the low 62s. Going forward, I do not see the rupee appreciating remarkably from here and therefore, it will be a reasonably good period for the IT sector, given the fact that you are beginning to see evidence that there is recovery in the US and in parts of Europe as well. So, I would be positive on that sector and if you want to put some money into equities then that would be one sector on top of my list. Q: How will foreign institutional investors (FII) react to the RBI policy? Will they be slightly hesitant to put incremental money into a market like ours purely because of the macro worries that were reiterated by the governor? A: I think they will react to it in a couple of ways. The initial reaction might well be disappointment, because they all have portfolios in India which at least today have taken a battering and had the RBI policy been a little different they might have done a lot better on their own portfolios. From an India perspective, from the point of view of what the country really needs most of us have taken a very positive view to what the RBI governor has done, because clearly he is acting in sync with the finance ministry. He is talking about inflation control and then being a partner in growth. He does not view his role as just being monetary policy and inflation focused, though that is extremely important at this stage. He is also talking about the second step which is making sure that growth happens once inflation comes under control. In terms of flows today both the global situation as well as situation in India is such that nobody is really looking long-term. From an overseas perspective, while people are monitoring growth in the larger economies, now people will also be looking to see what happens to tapering post-Christmas. From an Indian perspective our window now is six-seven months, because seven months down the road, regardless of when you believe elections will be held, even if you take the view like most of us are that it will be in May, seven months from now your model code of conduct will apply. Therefore, whatever policy action you will see, we are going to see for the next six-seven months, after which there will be at least a two-three months hiatus and then it all depends on who we have at the center. From the perspective of even the long-term fund managers, it will be very difficult for them to take a call or look at what will happen 9-12 months from now. So the focus will be six monthly. For the first three months of those liquidity is not a concern, therefore, in the next three months the focus will be what it is that we in India do to address the policy inaction that we have seen so far to get the focus back on growth and to control fiscal deficit and inflation which are two of our biggest problems.