Bullish on Nifty till Budget; bet on cyclicals: Alchemy Cap

The Indian market has witnessed a spectacular rally in 2012. This week is very important for the market. There are two important triggers this week. The RBI’s monetary policy review is tomorrow. Also, last few sessions of the Parliament’s winter session will be closely watched by the Nifty.

In an interview to CNBC-TV18, Hiren Ved, director and CIO, Alchemy Capital Management says the market is consolidating, but it remains in an uptrend. "Between now and Budget, I do think that the market direction should be upwards," he adds. He has increased exposure to the broader markets. "I expect the market breadth to improve significantly in 2013," he asserts. He has selectively increased exposure to high quality cyclicals. "We have still maintained our overweight on the consumption theme. Incrementally, we have increased our exposure to some of the smaller and midcap stocks and also some high quality largecap and cyclicals," he elaborates. According to him, rupee weakness is a potential risk in 2013, if fiscal gap widens. Also read: Nifty faces resistance at 5930-5950, says Udayan Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Q: What is the next big trigger for the market you think which can take it higher from here because it has been just grinding in a range for the last few weeks? A: I think the direction is up. We just took a breather in between because we saw pretty smart rally in September. I think that if the reform process, the resolve that the government is showing, continues and if we have a rate cut in January or a cash reserve ratio (CRR) cut in the December policy, they would be good triggers to take the market on its onward journey upwards. Q: You are buying at current levels because opinion seems split on what this market may do in January. Do you like some others fear a correction looming? A: We have been reasonably fully invested over the last few months and any incremental buying is dependent on the flows that we get. We are almost fully invested, about 90-95 percent in most of our funds. There may be a correction. Whether January will be an up month or a correction, is a very difficult call to make. Everybody in January last year, thought that we were doomed because of the way the markets ended in December, but January turned out to be very different. It is a difficult call to make on how January would be, but generally speaking, between here and budget, I do think that the market direction should be upwards. Q: Some of the triggers are in place already, like what is happening on the policy front or the kind of money we have been getting. Do you expect this to be a gentle grade up or one of those one shot kind of move, because that is what it looked like last month? A: Towards the very early stages of a rally, there is generally no supply in the market because people are very skeptical. As the market matures and the rally matures, you can see supply coming in. So, we have seen a spate of initial public offerings (IPOs) coming in into the market. If the market remains good, you will see a lot of qualified institutional placements (QIPs) coming because there is a lot of deleveraging which is yet to happen and people might want to use this opportunity to kind of raise some capital. Unlike, the early part of the rally, where there was no supply, it is difficult to think that we will see a very significant leg up. All said and done, we had USD 20 billion of flow through the last few days and weeks and the flows were very strong, yet the markets were pretty much in a range. One of the reasons why the markets might have a slow grind up is because we are going to see more supply of paper coming into the market. _PAGEBREAK_ Q: Tactically, have you changed your positions a lot even as you remain 95 percent invested? Have your bets changed going into the New Year? A: We have selectively increased our exposure to high quality cyclicals, though we have still maintained our overweight on the consumption theme. For us, that seems to be a long-term structural story in India but incrementally yes, I think that for us it is like striking a balance. Let’s not forget that at the end of the day, one doesn’t only have to make money, but also make money for investors in a manner where the volatility of the portfolio is maintained. Having everything in your portfolio, which is high beta, is necessarily not a great way to transition an investor to a better market, because the draw-downs can be pretty stiff. I think we have stuck a balance, but yes, incrementally we have probably increased our exposure to some of the smaller and midcap stocks which have been underperforming and also some high quality largecap cyclicals.

Q: For people who have been in the market for the last one year, they have approached it atleast till September, as a trading market. We will get those 10-12 percent sharp moves and again, the market would go back to essentially being in a range. Has your confidence increased that, that kind of structure has changed? Would you use any dips to buy because the base has been formed in the market? A: I do believe that we are making a base for an eventual breakout of this range that we have been in the last few years. Whether we will take it out this time around or whether we will have a couple of more of these intra-year corrections before we finally breakout, is yet to be seen. However, I do believe that if you look at the structure of the market, what we are seeing is that we had a very narrow market. What we are going to see in 2013 is that the breadth of the market will improve substantially. While some of the high quality companies will probably move sideways but they will largely hold on to their gains. However, you will see the other end of the market, which was languishing, will keep making higher bottoms. That is how the market should progress going forward from here. So, my sense is that you are going to see 2013 as a positive year, with a much better breadth in the market and hopefully making a base for an eventual breakout either towards the end of 2013 or 2014.
 
Q: How enthused are you about the primary market offerings? Are you recommending taking exposure via that space as well? A: We have not done anything. Though I think that NMDC was a good issue, it was priced right and there was money on the table for investors to make there. We have not done anything in this round, but we are open and we are looking. If there are some good opportunities, we could participate there.

Q: Domestically when you speak to colleagues and peers, what is the key concern going into next year? Is it global? Is it politics? Is it some kind of earnings dip again? What is the central risk going into next year? A: I think there are a few intriguing things. We have had a very good year as far as FII flows are concerned, but the rupee is still where it is. So I think, if we are not able to keep our fiscal deficit and current account deficit in check next year, I think one of the risks that might pan out, is that the rupee might weaken even further. That might fuel inflation and that may not be good for markets. However, what kind of probabilities we assign to that, remains to be seen, but that definitely seems to be one of the risks. I think the global risk overhang of what is happening will always be there. However, I do believe, with what Central Banks are doing and from what I hear from people who managed money globally, that a lot of the tail risk has gone off the table. There could still be issues globally. However, what is going to be very important, is whether the fiscal consolidation that the government has promised, is operationalised. If we are able to see that they are able to raise money through this investment, that they are able to raise revenue through the revised 2G auctions, if the market is convinced and if the rupee does not go out of the current range and weakens further, the I think we will be okay.