Kotak AMC sees mkt consolidating next year; 12-13% upmove

Alroy Lobo of Kotak AMC expects 2013 to be a year of consolidation, with the impending economic recovery and RBI easing supporting the market. He says the pick up in reforms process has been taken as a positive signal by foreign investors, which has led to "surprisingly strong" flows in 2012 and declining skepticism for next year. Moreover, retail investor participation has started to pick up gradually. Lobo is expecting markets to move up in 2013, but at a modest 12-13 percent (in rupee terms) pace.

"Some of the recent offerings in the market have seen decent retail interest. In fact, I would have expected a much stronger response to the tax-free bonds. So, to that extent there is reemergence of interest by the retail investors," he told CNBC-TV18 in an interview. He says it is also a function of the available alternate asset classes that retail investors have an option of investing. If retail believes that the gains in real estate or fixed income or gold are more or less done then perhaps the flow into equities would be much faster than expected. "We had a weak monsoon this year. Next year, hopefully, we will have a normal monsoon," he told CNBC-TV18 in an interview. In terms of worries, he says a global risk-off trade can lead to a sharp correction in India. The India-dedicated funds are still on the sidelines, he adds. Lobo says maintaining rupee stability and a credible plan to contain fiscal deficit is going to be the key task for the country’s government. Commenting on sector-specific issues, Lobo says he is now getting far more positive on the NBFC segment. "We also believe that cement has not only done well this year but it will do well even next year," he says. Lobo says the worst is behind for the telecom space and going forward there could be some amount of pricing power returning to the sector. Below is the verbatim transcript of Alroy Lobo's interview to CNBC-TV18 Q: 2012 has been a good year for you. Can you carry this optimism into 2013? A: 2013, to some extent, would be a year of consolidation. We expect markets to move up in 2013. In terms of rupee, one can expect a modest 12-13 percent rise. There are lot of positives which have been ignored by the market. The first important point to note is that we are coming close to the bottoming out of India’s GDP. I believe that good gains in market are normally received in the early phase of the economic recovery. The reason why we believe GDP will bottom out this year is because of the fact that monetary policy will ease as we get into 2013. We have already begun the easing process in early 2012. We see a continuation of easing of the monetary policy even next year. So, that is one big positive. Secondly, we had a weak monsoon this year. Hopefully next year we will have a normal monsoon. More importantly, the government has finally begun to act. Even though some of the big hard reforms are yet to through, but at least lot of those initiatives and reforms are now on the table. We believe that also would contribute to the recovery. Q: The big hitter this year has been money. What do you hear on that accord in terms of how money will flow at least in the first couple of months of next year? A: We have seen a surprisingly big flow of money this year, the second highest in the history of the Indian capital markets, of close to about USD 22 billion. The sense I am getting from investors is that they are still not in a hurry to put in lot of money in to India. They are waiting for certain positive news to emerge. Today, very clearly you have seen, some impact on the Yen that is positive for flows into India. They will be watching also global events. My sense is that given that India is a growth market and global growth is going to be pretty sluggish as we get into 2013, I think India will be a beneficiary of flows even next year. We have seen surprisingly very strong flows and it is coming from all quarters. Q: The bigger question is that when does the retail sentiment turn? We could do with some retail local flows in 2013. Do you think it will happen or it will be another year of sitting out and waiting for local participation? A: To some extent, we are seeing early signs of retail interest. Some of the recent offerings in the market have seen decent retail interest. In fact, I would have expected a much stronger response to the tax free bonds. So, to that extent there is re-emergence of interest by the retail investors. It is also a function of what are the alternate asset classes that retail investors have to invest in. If the view, very clearly, is that as far as real estate or fixed income or gold, if they (investors) believe that the gains in that are more or less done then perhaps the flow into equities would be much faster than we expect. Also Read: Axis Capital's 10 high risk-reward bets for 2013
IIFL's Nirmal Jain bullish on market; picks bets for 2013 _PAGEBREAK_ Q: Have you changed your positioning in your portfolio significantly going into 2013 by taking on stocks which you probably were avoiding because of higher risk profile in 2012? A: There have been changes in the portfolio. But these changes are dramatic because some of the themes which we have seen in 2012 will continue in to 2013. In terms of specific sectors, we are now getting far more positive on the NBFC segment in financials. We also believe that cement has not only done well this year but it will do well even next year. We are taking some profits off the table on pharmaceuticals and reallocating that money into these sectors. We have also started getting little more positive on the telecom sector. We think the worst has been priced in and going forward you could see some amount of pricing power returning to the sector. So, there have been some moderate changes to the portfolio composition in this year vis-à-vis how we looked at it in the next year. Q5: Any thoughts on two sectors that have been complete dogs for many years but are now moving – media and aviation? A: As far as media and aviation are concerned, they are moving for one reason that the FDI has opened up in these sectors. On media, we are definitely far more constructive because we see the fundamentals of that sector improving. So, it is not only a function of an event which is driving that sector but there are fundamentals as well. The economic recovery normally benefits the media sector and it’s an early stage recovery as far as stocks are concerned. As far as the aviation sector is concerned we do not really believe that the fundamentals would justify the move. So, it’s mainly event based. That sector has to operate at a very high load factor in order to generate free cash. It is definitely a function of what happens to aviation fuel prices. I would say that it’s more of an event play in the case of aviation, but media I would say is far more fundamental. Q: In this year of consolidation that you foresee, do you think it is going to be very front ended in terms of its gains where the first quarter of the calendar year is going to have all the big elements in it, the budget, momentum, may be a little bit of earnings and that is where the big returns will be made? A: I would say that it is not going to be only front ended because post budget we will have a cleaner calendar for markets to perform. There will be uncertainty around the budget. This is the last budget of the government before they get into the general elections in 2014. It is going to be to some extent having some social element in it. The good news is that the government has begun to think on direct transfer of payments which could be the mantra as they get into the voting season. Last time they had the National Rural Employment Guarantee Act (NREGA), this time it could be the direct transfer of subsidies or direct transfer of payments to the voting population which could be viewed pretty positively. If that happens, it serves both the purposes. It helps to contain the fiscal deficit. At the same time, it serves the purpose that they want to achieve as far as pleasing the poorer sections of society. Having said that, my sense is you are going to see a little volatile market for the next year, but the trend is clearly on the upside. One will have to ride through these small corrections as we get into next year because not only India that really matters, but it is also events that would happen globally. We are already talking about issues connected with the US fiscal cliff, euro zone continues to muddle through. So, these issues will continue to plague the markets. So, I wouldn’t say it is going to be front ended, but I would say that despite the volatility the trend is upwards. Q: You spoke about being bullish on Non-bank financial companies (NBFC). Any particular leg of it because they are very disparate companies, some in auto financing, some in infrastructure finance, some gold loan companies. How much of it is predicated on? A couple of them may be being even in line for a banking licence in 2013? A: It is a combination of lot of these variables that you spoke about. In the infrastructure segment we are getting little more selective. It’s not investing in all infrastructure financing companies. We need to see the potential non-performing loans that could emerge in this sector. So, we are being very selective as far as the infrastructure financing companies are concerned. As far as gold loan companies are concerned, we are seeing some value in certain entities. We believe that with the reducing cost of capital going forward, some of these NBFCs which have not done well historically could now start getting interest. So, that is the reason we are getting little more positive on the NBFC segment. Our pecking order in the banking and finance segment is, first the private sector banks, then the NBFCs and last is the state owned entities, that also very selective. _PAGEBREAK_ Q: How are you approaching some of these companies which have lot of debt on their balance sheets in 2013? Capital raising has picked up quite a bit in the last few weeks. Do you think some of these companies can go out and repair their balance sheets significantly in 2013 and add that back to their market-cap? A: The market participants are pretty discerning as far as fundamentals of these companies are concerned. So, money will flow through those companies where market participants believe it will help them to significantly improve their financials. Just giving money to a company where the basic business model itself is weak would be foolhardy. I would say that the good companies will continue to get the flows. So, it won’t be like a one brush for all the companies with debt on their balance sheet. We will have to look company by company. Some companies its worth investing because that is the key issue for them to stage a recovery. But by and large most of these companies which are saddled with debt have other issues besides just debt-equity issues. Q: How much interest do you sense there is amongst the institutional guys on some of the government offerings after the National Mineral Development Corporation (NMDC) experience? A: It is not about government offerings. It is more case to case. NMDC was a very attractive offering. It is a pretty good company. The stock price had corrected before the issue. It is reporting pretty decent cash flows. It’s in a good segment. So, those kinds of issues will anyway gain interest. If those kinds of issues come to the market I don’t see any reason why institutional investors won’t participate. There was clearly a lot of value left on the table. So, if it is priced well, you will see lot of interest in these government related issues. Q: At this point, while there is debate about whether it will be a year of consolidation or performance, the consensus seems to be there is limited downside for the market? Would you agree with that? Do you think through the course of this year we have made a much higher and more stable floor for ourselves? A: I would say so. If you look at the range as far as the bottom is concerned, they have been raised by most strategists in the market. The reason being is that, expectations versus reality, they have clearly converged. If you look at the beginning of this calendar year, there was a very big divergence between what the market expected and what came out as reality. That’s the reason why this had to sort of readjust to make sure that we will see a positive recovery to markets. My sense is that, that phase is now complete. Even as we go into 2013, I can tell you that most of the market participants are not really banking big on reform progress. They do understand the challenges of passing certain reforms to both house of parliament. So, the issue is that they are sitting more tentative saying that if it comes in, it is a big positive and perhaps market would react to it. At the moment they are not really betting either way. So, I think you will see positive surprises to the market going forward. The key issue for India is to manage the fiscal deficit and to keep the currency under check. I have been talking to lot of international investors and perhaps the two-three big issues that they really highlight, one is clearly the Indian currency, that is clearly preventing them from putting big money into India. They have seen lot of gains being lost because of the depreciation of the Indian rupee because it impacts their dollar returns. The second is clearly politics and we have seen certain changes in this current year. Thirdly, if these two are not well managed then would that in anyway have an impact on India’s rating? If India is able to come out with a more presentable plan in terms of managing their fiscal deficit, have a growth recovery and have more of pro-growth policies by the government, then it will take care of the Indian rupee and that will be a big positive for the Indian market. So, I would say that, on the margin, I am expecting a mild recovery next year which is good. It will definitely support 12-13 percent upside that we are speaking about. Q: People have been telling us that lot of the money which came in, in the last four to five months has not been through India dedicated products, but may be ETFs and other kinds of, what they like to classify as hot money. How vulnerable is our market to a global sell off because of the fiscal cliff or any other issue? Do you see the possibility of a few billion dollars going out quickly if the world goes on risk off mode? A: The India dedicated funds have not really seen flows. Most of the flows that have come into India have come in through allocations into global funds, emerging market funds and also through ETFs. So, in the event of a global event those flows have the risk of moving out. For India, dedicated money to come in we need to have tail-wind of lot of things converging and a good set of reforms, monetary policy to support India story. What India needs now is more good news flow on international press. In fact even some of the serious investors who want to put in money basically want to see good news emerging from India. No one wants to bet on India before the event. They want to see things emerging. They have waited for too long. If India is able to deliver you will see a good amount of flows coming to the market. India dedicated money has not been coming in, in this particular calendar year.