See Nifty at 5800-6100; eye pharma, pvt banks: Dalton

The performance of the auto sector over the last few months has been a concern and Infosys having to go back to Murthy is not a great sign for the IT company, says UR Bhatt, MD, Dalton Advisors.

He suggests investors to invest in private banks, select pharmaceutical stocks and the FMCG segment and expects the Nifty to trade in the 5800-6100 range, if the support level not broken.

Speaking to CNBC-TV18, Bhatt advises investors to adopt a wait-and-watch approach for the market due to the lack of concrete triggers. "CPI inflation remains elevated and there is no convincing case for any significant rate-cut by the RBI." Bhatt dissuades investors from expecting much from the RBI in its credit policy in scheduled to be announced in June.

The analyst expects FII withdrawal on continued fall in the rupee which has caused a lot of nervousness in the market lately.

He sees the immediate support for the market to be at 5,800-levels and set his near-term target for the Nifty at 5800. "I can see some short-covering bounce and rupee will remain a major overhang on the bourses."

Below is the edited transcript of the interview on CNBC-TV18

Q: The first signs of this liquidity withdrawal led to a pretty sharp reaction on the market. What would you expect to see through the course of the next couple of weeks?

A: The ferocity of the fall on Friday probably would ensure that there is a slight bounce back, but otherwise given the state of the rupee and given the fact that foreign institutional investors (FIIs) have actually lost money since they invested USD 14 billion from January, I think one needs to be circumspect about the outcome.

The immediate support could be somewhere near this 200-day moving average which is just about 5800 and after that we will have to revisit the situation after seeing the course of the monsoon, what happens on June 17, what Reserve Bank of India (RBI) does on June 17. That will set the stage for the market from thereon.

Q: The fall of the rupee has actually been far more consistent and far deeper than one imagined through the month of May. What kind of risk would you associate for the equity market in the month of June? What would downside risk point to in terms of losses?

A: Around 5780-5800 is the sort of level that it could probably to go if the slide continues. Historically, the rupee’s fall has always been a step function and has never been smooth. It suddenly happens in one month and when it happens, the fall is somewhat deep.

So we are again at that stage and there will be lot of nervousness on account of the rupee. That was what you saw on Friday when FIIs also hedged their positions and probably even took some money out, both in the cash and the futures market. Therefore, the mood of the FIIs is something that needs to be watched closely.

Q: Is the RBI policy in June a trigger for the market at all or do you think the market has pretty much ruled out any kind of action from the Governor this time?

A: Not too much. I do not think the market expects too much from the RBI and always hopes that Subbarao can spring a surprise. That apart I do not think there is a convincing case for a huge deep cut in repo or in the cash reserve ratio (CRR) because the consumer price index (CPI) inflation continues to be high.

With the rupee having fallen so deeply, the transmission of inflation within India will continue. Therefore I do not think there is a great case for a deep cut and so therefore the market is not expecting anything big from the RBI governor on June 17.

Q: How should the equity markets be approached at this point in time? Is it a good time to be accumulating on the downside or is it just a wait-and-watch strategy considering that there are no concrete triggers lined up?

A: Since there are no concrete triggers, a wait-and-watch strategy should be the way out. Also one should keenly see whether the 200-day moving average about 5780-5800 is broken. If that is broken, then you should take your bets off the table. Otherwise there is a possibility of a trading range between 5800 and 6100.

Q: What is your sense of how global liquidity may move through this month? Aside from performance issues, if it remains as flush as it has in the system do you think money could keep the market afloat through the month of June?

A: Not really, and Friday is an indication. You have a situation where economic data from the US seems to be better every day — whether it is on unemployment, housing or consumer confidence. Therefore, there is a very strong possibility that the Fed might really think in terms of stepping off the gas pedal of quantitative easing (QE). That is something that will keep the markets nervous.

I think the pain in Europe will continue and the unemployment data released on Friday reveals that the situation is pretty bad. The election rhetoric in Germany has already started. Therefore the outlook for FIIs to pump in money is not as sanguine as it was in 2012 and FIIs are able to make more money by investing in developed markets, most of them are at very nearly historic highs.

They have made about 14-15 percent in US and probably just under 10 percent in UK and Japan has been a phenomenal performer despite the recent fall. Therefore there is no great reason why they should keep on pumping money into emerging markets like India as of now.

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Q: In absolute terms we are not that far from our all-time highs either. At this point though given the concerns that you are pointing out where do you think the cap may settle at for the market or the ceiling of sorts?

A: The all-time high is a very big resistance; there is no question on that. Even at all-time high in India for the FII investor in dollar terms it is very far away from the all-time high, probably 30-35 percent away from all-time high in dollar terms. Given that the situation for the foreign investor, it may not really represent great prospects for investing, but for the Indian market, a five- percent gap from the all-time high is a very big chasm to be bridged.

Q: So at this point you would recommend not taking any fresh positions in the market?

A: Yes, that would be the prudent action as of now.

Q: What kind of tactical approach would you take portfoliowise going into this month? Which kind of sectors would you still feel safe investing in?

A: With the sort of depreciation the rupee has seen, IT is one sector where one could probably be investing in along with the usual favourites during this run in the market. With the uncertainty that you see going ahead, I think it is best to hide in quality sectors like private sector banks, some pharmaceutical stocks and the FMCG (FMCG).

This is where one should be overweight. Also the fact that there is a very good potential for a reasonably big fall, therefore at appropriate times one should hedge by seeking some protection to the market.

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Q: There was quite a bit of enthusiasm on Infosys. For the slightly longer term, how would you approach that stock?

A: The change at the helm needs to face the acid test. Only time will tell. Two things that Infosys was held in high esteem for, professionalism and meritocracy, have been given the go by. However, it is positive that they the problem has been recognised and some action has been taken.

Secondly, having to go back to someone who has retired is not a great sign of building leadership. Infosys always said that it is not a family-run business, but now that sort of rhetoric looks a bit hollow. The upside is that. Murthy knows his business very well, so there could be some dramatic change.

At least, the market seems to be in a celebratory mood. I think finally the next few quarters will tell exactly whether Infosys have been able to stem the slide.

Q: How do you approach the autos? Tata Motors got the strongest reception because of its earnings. How are you feeling about this space?

A: The auto sector is going through tough times in India. There is no doubt about that. The negative growth seen for several months now should be the cause for reasonable worry. I think till there is a requirement in the economy and a revival in the consumer sentiment, one really cannot expect anything dramatic to happen in terms of the auto earnings. Everything is juxtaposed on what will happen in the next few months — the run-up to the election and government spending.

Q: How would you summarise domestic mood right now? Do they expect to see a far sharper fall or are they just not convinced about buying right now?

A: The retail investor is certainly not convinced about buying and even institutions, except for probably slight positive inflows on Friday, have been consistent sellers for last several months. So therefore the domestic mood is not very good. The state of governance in the country also does not inspire lot of confidence. We always see new things coming out of the woodwork in largely midcap companies for quite sometime. Add to this is the pressure of probably half a dozen OFS (offer for sale) a day.

With the increased negative newsflow, the market seems to always clamouring for some positive news and so the RBI policy announcement and monsoon are eagerly awaited. Generally, the outlook does not seem to be very good as far as consumer sentiment is concerned. Things can change if the government takes some decisive action.

Q: Within the defensives, pharmaceuticals had a very difficult month and posted very disparate performance. What would you do with pharma stocks now?

A: As I said the undercurrent crisis-of-governance in the last several months among the most midcap companies is something very serious. I think that needs to be addressed very strongly through better regulations and monitoring. That is something that has really created a big divide between those who have suspect governance and those who have very good governance. Therefore you will find a dichotomy as far as even valuations are concerned going forward, even among pharma companies.

Q: A lot of investors have been very confused about the earnings season in the sense that it has not given you any kind of decisive trend on where earnings will head. What are your key takeaways from the earnings season and how you would approach it in the context of the market?

A: The earnings for last quarter have been flat. There is hardly any comfort that can be  drawn from the very anaemic growth from corporate India. Finally, the Indian economy has slowed down its rate growth over the last several years on account of investment and the investment pipeline is very shallow because of problems in terms of approvals for the last one year or so.

So as long as the investment pipeline is so weak, it does not look like as if earnings are going to change dramatically or may have even probably have hit the bottom. Therefore the earnings outlook is not very good and given that even at 14 times current year earnings, it does not look like as if it is very cheap.

You can always make the argument that it is probably below historic average of PEs, but I think that is downright silly, because PEs have to be seen in the context of earnings growth and the earnings growth outlook today is much weaker than what it has ever been.

Therefore, I think we really do not have too much for comfort on account of valuation, not too much for comfort on account of the investor sentiment and in terms of governance. So unless something changes, at least in terms of governmental action we do not see anything dramatic happening in the market.