Geosphere expects market to eke out moderate gain hereon

The markets started January with a bang and are now taking a bit of a breather or a pullback. Arvind Sanger, managing partner, Geosphere Capital Management expects the stock markets to eke out moderate gain from hereon. Overall, the fundamentals of the market for the next few months look reasonably decent but there are some headwinds near term particularly with what is going on with the US. The continued debate on debt ceiling and whatever tax policy needs to come out creates some uncertainty.

“But when I look at global growth indicators-whether it is coming from China or US or even from Europe-things are not getting worse and may be even getting moderately better and therefore on global basis things looks reasonably good,” Sanger told CNBC-TV18. Below is the verbatim transcript of an interview aired on CNBC-TV18. Q: How is January picture looking like? Are you bracing for a January correction or do you think markets will pickup once again after being sideways for a few sessions? A: We started January with a bang in the first few days and then taking a bit of a breather and a pullback. It is very hard to call what the rest of the January will bring but January usually a good month and a decent precursor for the year. My expectation is we should eke out moderate gain from here but I do not claim any great expertise on being able to call such a short-term fluctuation. I think overall the fundamentals of the market for the next few months look reasonably decent but there are some headwinds near term particularly with what is going on with the US, continued debate on debt ceiling and whatever tax policy needs to come out creates some uncertainty. But when I look at global growth indicators whether it is coming from China or US or even from Europe, things are not getting worse and may be even getting moderately better and therefore on global basis things looks reasonably good. Q: Does it seem likely though that until February, which is when the next round of meetings happen on the fiscal cliff discussion, markets could see a bit of a correction because that also ties in with the period where people are most bullish about India’s prospects? A: I think one of the risks remains the ability of US Congress to reach some kind of a reasonable outcome on raising the debt ceiling in exchange for some agreement on both taxes and spending cuts and given recent history one should be cautious about how easier deal it would be. I would call it more choppiness than a massive selloff. I think one could see some corrections if the market gets nervous that the politicians are finding ways to create problems. But the thing that surprised me and certainly the markets proved to be more resilient than some of us were concerned might turnout to be is that the economic fundamentals despite all the uncertainty in Washington have remained relatively positive and so the real issue is, has main street both the business side and the consumer side learned to switch off Washington a bit and focus on the broader economic fundamentals and the Fed provide liquidity, provide support. I think it will be battle between how dysfunctional is Washington versus how functional continues to be the economic outlook and how much of a help the easy money policy out of US, Europe and Japan continue to help the market. So the tradeoff of the two makes it more likely to be choppiness within a range than any sharp corrections or sharp rallies which will cause a run away move in either direction.  _PAGEBREAK_ Q: What kind of tactical approach are you taking in that case to markets in the near-term? Are you using periods of weakness to buy into the market or is this a no trade zone for the next couple of weeks? A: We are focusing on bottom up fundamentals of the companies that we like. We are using selloffs to buy companies that we do like and at the same time if we get sharper rallies as we got at the end of the last week, we are taking a few chips off the table or putting it on some short or hedge market risk. So, we are trying to be a little disciplined in terms of both sides of equation, not getting too carried away in the short-term or too pessimistic on any pullbacks. Q: What is your view on the Nifty, do you think it has got a good short at an all time high? A: If I look over the next 12 months it certainly could get there. We have talked about what is happening in the US and globally. I think India specific issues remain the pace of the earnings or the gross domestic product (GDP) recovery and my assumption is that FY14 will be better than FY13. I do not expect the results coming out of the December quarter to be anything dramatically different than the September quarter result. For the Nifty to get to new levels, we will need to see inflation remain benign, the Reserve Bank of India (RBI) policy become more accommodative in terms of interest rate policy and the Union Budget relatively disciplined, even if it will have to have some sops since its probably likely to be the last Budget before the next general election. Therefore there are two-three important things that need to go right and certainly the current account deficit is another issue that one needs to keep an eye on. But as long as nothing too untoward happens on any of these fronts, we do expect the Indian market to work its way higher and it should approach and maybe even exceed previous highs.   Q: From the level of 6,000 Nifty onwards, which ones would you be more overweight on, consumers and cyclical? A: I would say consumer has been the place where people have been hiding. If the market is going to go higher, it’s not going to be on the back of consumer stocks alone. I think that it is going to require benign interest rate policy, it is going to require further indications that government policy continue to provide some positive help for the market. So, I do think that the consumer sector is fine but is priced for perfection. It is not what is going to drive the next leg of the market move up. If I am wrong and the market goes sideways to downward then consumer stocks would probably be one of the safer haven. But if the market is going to go higher then it is going to be other sectors. One of the things that we find is selective opportunities in some of the companies in the power sector, not because I am counting on any big bang reform but some companies have power plant in a market where, as one saw in a recent bid for Uttar Pradesh’s power purchase requirements where prices are moving up, people who have a position and have a balance sheet that is containable could benefit in that environment. Similarly we think that the energy sector, oil and gas, there is some rationality coming in on energy policy as one saw with the announcement by the petroleum minister on Cairn India’s exploration allowing them to go ahead and one might see some rationality coming on gas pricing post March 2014. All these suggest that this is another sector where one could see some positive trends. Financials, if interest rate policy works is a sector that should continue to move higher. So those are some of the areas where we think some of the opportunities lie. There maybe other areas where if the government follows through on infrastructure with the plan for one body making decisions on major investment decisions that could benefit. But right now we are not completely convinced of which stocks make fundamental sense in that space. _PAGEBREAK_ Q: What have you made of the recent reform proposals in terms of doing piecemeal price increases, attacking products like diesel, liquefied petroleum gas (LPG), kerosene? A: I think oil and gas in India has gone to a level where the government has done a lot of things wrong in the past. Things have gone so bad that at this point the recognition has donned and that is the reasons why Indian oil and gas segment is one of the most interesting sectors in the world because the recognition has donned in the policy circles in New Delhi and there is almost nothing they can do except some rational decisions. If there are rational decisions made on diesel price hike reducing the subsidy burden there and if there are rational decisions made on gas prices through next March 2014. All of those suggest that oil and gas companies in India could see meaningful exploration upside and all of that would be positive. The price hikes on petroleum products also helps some of the public sector undertakings (PSU) which have been no go areas for us and some of those could be interesting. Q: Would you still be betting on India in terms of eking out a performance like it did in 2012? A: I would tend to agree that given the general election looming the market is going to have some headwind related to policy uncertainty, election uncertainty. Therefore, accounting on the rebound that we had last year, which was from a strongly oversold level maybe a little optimistic to 25-30 percent move in the market this year. But getting a double digit move in the market is certainly possible and feasible as to how it will play out throughout the year. I am not that sure. Our approach in Indian market is that we are in a more rational market where GDP growth has bottomed, earnings growth has bottomed. It has become a stock picking market rather than making a big market call, we are finding specific companies and sectors where we see the fundamentals shaping up well and that is what we are betting on. Q: How would you approach gold in 2013 and whether you would buy any of the global commodities, metal play in India? A: I think that the Chinese economy is showing signs of moderate improvement and that is helpful for the commodity markets. As a result we are finding opportunities globally in some commodity stocks. But with some of the recent run up in the global commodity stocks we are cautious short-term; we do not think the Chinese growth story is ever going back to very commodity intensive infrastructure and housing led growth that we had till about a year ago or earlier. Therefore, commodity stocks again require more selective internal catalyst with relatively stable commodity price environment rather than counting on either copper or alluminium and any other major commodity having major run away rallies from here.