Hold on to long positions, but be on alert: Dimensions

Ajay Srivastava of Dimensions Consulting is holding on to his long positions for now, but is closely watching the market for any sign of trouble. In an interview to CNBC-TV18, Srivastava says traders are likely to cut back on their positions in the run-up to the Budget.

Foreign funds hold the key to the current uptrend, and any slowdown in capital inflows could trigger a correction, he says. That is because domestic institutions have not been investing. Any correction, however, should be used to accumulate blue-chips. On the fiscal side, he says the government has limited scope to reduce expenditure. And as it tries to maximize revenue targets, it may have no option but to increase taxes. Below is the verbatim transcript of an interview aired on CNBC-TV18. Q: Are you beginning to take profits now or are you holding on to your position that you have been building for the last three months? A: We are holding on to the positions but very carefully watching the market because the only thing trending up is foreign institutional investor (FII) inflows. In terms of fundamentals with the rupee-dollar situation, the deficit situation, the panic on the gold situation that is emerging out. There are negatives coming but one does not want to lose the momentum so hold on till the FII flow coming in. But the day the sellout starts that’s the time to move out or possibly as one gets closer to the Budget that’s the time to lighten up positions heavily and that’s what we plan to do and advice our customers. Q: Do you think this is practically the last phase of the upmove in the near term and if yes then what kind of tactical positioning you have in the portfolio to play it? A: I do not think it’s a last leg because fundamentally everything has been driven by liquidity and if it keeps flowing in, one can argue against it with the fundamental but the fact is liquidity comes in, people buy stocks and the price goes up. The fact is that one got to stick to pharmaceutical sector, stick to the big ticket pharma names and one is safe and one is safe in consumer names, the big banking name. I think one is exposed if one is into the capital goods sector because there could be surprises on the negative sides still hitting the market. So one got to lighten up the position because come the Budget and that’s where the problem starts and our expectation is there will be revenue maximisation effort in this Budget because there is very little scope for the government to cut down on their expenditure, are forced to cut down on deficit so, what the net effect is going to be,  revenue maximisation and that could be gold tax, could be any amount of duties, could be income tax increases at the upper end of the cycle, could be whatever it is but it has to be revenue maximisation Budget because by and large expenditure side looks to be where it is going to be. There are no major cuts foreseen with the election year coming. So, looking at every maximisation, looking at the balance of payment deficit, looking at the rupee at 55, oil not coming down, I think one is saying the fact that government will ask more money from the low domestic market. So, the only trigger left therefore is the foreign liquidity coming in. If that dries up, the problem starts. If that continues the way it is then one is on a safe ground.      Q: In the event of a correction do you think it will be a deep one, in fact almost a trend changer or would you look at any correction in the market as a buying opportunity again? A: I do not think it will be a trend changer because by and large domestically apart from our positions most of the domestic market is underinvested including the institutions. Institutions have sold a lot of equity in the last 12-18 months. So domestic market by and large is underinvested therefore we will see if there is a significant correction. We think there will be substantial buying opportunities and we may not see big correction in the names we want to get into. We may not see big correction in HDFC or HDFC Bank, ICICI Bank or the margin in banking sector. We do not see big corrections in consumer names. So the correction might happen to the sector of the stock market where there is huge speculative buying and I do not think that’s the place one want to go in. So if there is a good opportunity with a correction, it will be a good buying opportunity because come May-June-July, whenever post Budget euphoria ends, these companies will come back and report good results again. So if there is a correction, the time comes to rebuild a blue chip portfolio again. _PAGEBREAK_ Q: We have been all talking about hopes of rekindling the investment cycle over the last many months. There was so much of excitement about the National Investment Board etc, do you think these instances of National Highways Authority of India (NHAI) going very slow, some of the build, operate and transfer (BOT) projects coming unstuck means that that is probably still an area of the market that you cannot bet on with any degree of certainty? A: I think you cannot blame the company as well because (1) if one cannot get an approval to do something at the end of the day then one cannot keep holding an obligation on to it (2) can the government set it right in the next 12 months before the election – obviously the answer is yes, it can set it right but will it have time and energy to do it, perhaps the answer is no because the agenda is so long now going into the elections that things like debottlenecking a roadway project perhaps would fall very low on the priority. That is what I said that on capital goods side one could see negative surprises because the so-called momentum that one thought (a) will take time to build if the government tries it also and (b) you are seeing a reverse flow today; order books are falling, people are shutting on projects, people want to get out of all the BOT projects etc, rightfully so because they cannot execute. But the fact is that the built-up of expectations is now paring down to reality. So even if the government wants to do it, sentiments can change but on the ground order book release cannot happen before 24 months to 36 months post closure, post financial closure and then the agreement. That is a long process. So whatever the government does in the next 12 months cycle – I do not think capital goods cycle is looking for a revival.  Q: Would you be buying anything in the oil and gas space? A: We have started to buy the oil and petroleum companies for the last two weeks because that’s the last bastion left before the Budget. I do not think they will leave it to the Budget to do any increases. So, whatever bad news has to come will come now and it is going to be positive. They need to balance the Budget. I think they will bite the bullet because politically they are in the strongest position so, it is time. In December we had said that the next leg should come from oil and gas and it is on track now to see that oil and gas companies should do better because government will be forced to go into market pricing before the Budget. Q: Have you been buying anything from metals and autos? A: We have been running our position in metals. We built-up positions in December in non-ferrous metals, particularly Hindalco and is doing okay now. We continue to hold the position at this point of time. We are comfortable in the non-ferrous sector. We are not selling off but we may look at in cashing part of the profit. But Sterlite Industries is like a shaky character at this point of time. So yes, we have bought but I do not think whether one should buy theses stocks again at this point of time. An upside of 15-20 percent could still be coming in the stock but I do not think more than that is likely in the next 30 days. Q: How are you positioned in IT.? Would you take contrarian buy positions now or do you think 2013 will be a tough year for them? A: The last position which we sold off was Oracle Financial Services Software. We never went for the mainline. This is one stock, which has done handsomely last two years when the main IT companies were in the doldrums. We have washed our hands of IT at least for the first six months of 2013 because one cannot see a trigger for a good increase and that is an important point. There are enough stocks in the market where one can walk and do a little bit of trade, make 10-20 percent profit or a long-term invest. But IT does not offer a long-term invest proposition, does not offer a short-term invest proposition maybe some marginal return case. So, allocating capital to IT has been impossible. We are by and large zero in everybody’s positions or in the stocks.